10 Tips for Small Business Owners Profiting Over $1 Million

On today’s video, we’re talking about ten tips for small business owners who are profiting over a million dollars. We see a lot of businesses have big numbers, but really, when it comes down to the financial planning of the business owner, it’s what the actual take home is from the business. Unless a business sale occurs in the future, this is geared towards business owners profiting over 1 million plus. So we’ve got ten tips. So taxes are obviously a huge concern for a business profiting over a million dollars. So some of these are going to be tax based, financial planning based, and then some are going to be, you know, just increasing the autonomy you have in your business as well. So, Chris, give us tip number one.

So tip number one is, guess we could just call it optimizing the retirement plan for your business. So lots of options that you can do here. If you’re a business owner, you can tailor this exactly to your needs personally and for the business. So a common combination that we implement is a 401K with either safe harbor contributions or profit sharing contributions, both of which are tax deductible for the business, and then also utilizing a cash balance pension plan, which is a big tax deduction generally based on a lot of.

People we see have a, they just have a safe harbor, maybe they’re matching three or 4% to their employees. It’s just an easy. And typically this means advisors come in the door, they’ve done a big lift of getting the 401K established. This is a pretty much set it and forget it approach, and you’re leaving a lot of potential tax savings, retention methods, and just putting your retirement plan on steroids on the table. So if you implement a 401K, we’ll call it like a 2.0 with a profit sharing component, and then on top of that, establish another bucket of a cash balance plan. It requires a lot of work. I mean, an advisor team will have to go in work with an actuary to make sure the plan passes the test on a year to year basis.

And you know, that advisor has to be very aware of your cash flow needs. And do you have a big tax problem, when to fund this, how to fund this, etcetera. So do we recommend it? Yes, absolutely. But we see most business owners don’t have this in place purely because something’s been put on autopilot. And something like this typically recommend shouldn’t be put on autopilot because you’re leaving a lot of money on the table if you do so. So that brings us to number two. Number two is, are your key employees retained? If you ask yourself the question, if I lost my top three team members tomorrow, would the business be okay? Or what would I do to replace that? So one of the biggest incomes is you’re going to have the cash flow to replace. You have the recruiting methodology in place.

And so one of the things we do to help our business owners answer that question, and if the answer is no, then we want to put some extra compensation on the table for those three employees, but something that they may not get unless they stay there for ten years. So if they walk away in year five, the business keeps a lot of that cash set aside. And that way, if that person leaves now they have that cash, they can use the recruiting the next valuable team member to replace that person. Or if they don’t leave and that person stays ten years, then their efforts and they’re being key are greatly rewarded for their loyalty, for being there for ten years. Okay, so that’s tip number two. Tip number three is all about taxes.

So, Chris, just give us a couple examples of how a business owner profitable $1 million. Some considerations they should look at for saving taxes that are above that. Just the obvious stuff.

Yeah, absolutely. So the first one, depending on your business structure, you could look at forming or filing as an S corp. This allows you to split your income between a w two wage or a salary that you pay all the normal taxes, federal, Social Security, Medicare, state tax, and then the second portion of the income split into an S dividend. And that compensation avoids Social Security, Medicare tax, and local taxes as well. So potentially some big tax savings.

Big tax savings. And for someone profit of a million dollars, probably you need to pay yourself a reasonable w two above the Social Security wage base. So you’re really looking at Medicare and local taxes. So 2.9 if you live downtown Pittsburgh, using Pennsylvania’s example, that’s another three. There’s 6%. So if you have a profit of a million dollars, if you’re distributing that to yourself, that right there is like a $60,000 tax savings just by being an s corp and distributing it versus w doing it to yourself, that’s huge. So give us another one.

Another one. Section 179 of the tax code. So this allows business owners to write off certain expenses. Oftentimes it’s tied to cars. So you could get a big write off depending on what type of car you own.

A couple years ago that was 100%. That’s now decreased, but you still get the full deduction over several years, but it’s still a big percentage you’re able to get even 2024 for the car, it has to be over 6000 pounds. Then many other strategies that can be done, obviously case by case basis. But tax management and more taxes you save legally, only legally is something that you’ll be able to pour back on your business or your financial plan and reap the benefits of the hard work in your business. So that was tip number three is around tax management, tip number four is around. Just answer the question. Do you work for your business or does the business work for you? And what we found is most small business owners that profiting just over a million. You work for the business.

So being able to figure out having systems in place, having a good financial plan in place will allow you to uncover the weaknesses, to make sure that you’re actually pulling the right amount of money to secure yourself, your family and the future. And also make sure the business is healthy so your clients are served, your employees are served, the business itself is still to operate if something, an emergency happens or something happens. So that brings us to number five. What’s another question a business owner should be asking themselves?

I’d say if I, this one’s a little bit morbid. If I died, became disabled, or something bad happened with my family, clients and, you know, would everybody be okay?

Team members with the business?

Yeah.

Yeah. Would everything still operate 100%. And this is something, you know, really important planning. You know, who would take over, who would buy it. If you have a partner, you know, that partner now has your spouse as a partner who maybe is not involved in the business, that can cause issues. So having contingency plans, buy sell agreements, having these properly funded, a lot of times with, you know, insurance products can make a lot of sense. That brings us to tip number six, which is just utilizing technology and automation as efficiently as possible. And this is something that we can consult with you. There’s a lot of tools out there to save 1020, 30 hours per week. Some tasks that you’re doing that can simply be automated or outsourced to technology. Obviously, compliance wise has to be checked based upon what industry your business is.

So that brings us to tip number seven, which is a type of entity. Chris, you hit the S corp. The other structure is you could do a sole proprietorship. So just with a sole proprietorship is their ability to save those taxes that we described, Social Security, Medicare, local, not as much.

You got to elect as the S corp to take advantage of this sole proprietorship.

Everything’s flowing to you, everything’s going to tax at every level partnership, you can do what’s called a guaranteed payment. You’re still going to have to pay your own taxes. You can still distribute the money to avoid Medicare and local tax like we talked about. But a partnership versus an S corp, that’s a really detailed conversation. Partnership gives you a lot more flexibility with how distributions occur, versus an S corp is very rigid. It’s strictly based upon percentages when it comes to profits. So that’s a huge decision. I think one of the biggest ones. So tip number eight is how you handle cash flow. A lot of business owners profit from a million. They have huge tax surprises.

So you really want to manage cash flow effectively, keep a monthly profit or loss, look at your estimates on a quarterly basis, and then have a philosophy. If you have a really good year, don’t inflate your lifestyle out of control, because maybe that’s not going to happen next year. A lot of businesses are cyclical, so having a really disciplined with how you distribute, you know, most times we recommend on a quarterly basis, look at what are the profits, you know, what are we going to take out for taxes, what do we take out for your personal financial plan to save? What do we want to reinvest in the business? So that brings us to tip number nine.

Chris, how are you attracting new talent?

Yes, I think the biggest rule of thumb here is if you’re attracting new talent naturally, if people are emailing you in, because if you have good marketing or social media presence, this is a huge expense you can save. If you’re in a really niche type of business, probably having a professional recruiter as well at that level is key. The biggest one, the hardest one being a business owner myself, is are you a bottleneck to your own business? Are you giving autonomy to your team members to make certain level decisions as you go from zero up to a million dollars of profit, it’s a lot of stuff you had to figure out by yourself, and it’s really hard sometimes to give up the reins. But just asking yourself, where am I a bottleneck in my business and how do I remove that bottleneck?

How do I give my key team members the ability to make decisions without my involvement? If I were dead tomorrow, how would make sure the business is still going to thrive just as much as it was with me or me not? There. Those are our ten tips. Chris, thanks for joining.