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Your Investing Life: Starting your own business

September 03, 2013

Whether you're starting a one-person consulting shop or an enterprise with a number of employees, you'll have a lot of planning to do and decisions to make—strategic, operational, and financial. With all these things to manage, your personal financial goals, and the way you invest to reach them, can get pushed aside. To help balance your personal and business financial goals, check out these.

Check your savings cushion

Do you have enough saved to cover living expenses until your business can support you? Many businesses take months (sometimes years) before owners can start to pay themselves.

Financial advisors (including Vanguard's) generally recommend you have anywhere from three to 36 months of living expenses in your emergency fund. If you're planning on running your business part-time or contract-by-contract, you may want to build up your safety cushion even more to be ready for a drop in income until your business starts turning a profit.

Your family life. Your work life. Your investing life.

When "life happens," your financial and investing plans can sometimes get moved to the back burner. These articles can help you bring your investing life—and its effects on your (and your family's) financial future—back to the forefront.

» Starting your first full-time job

» Changing jobs

» Going part-time

» Going back to work

» Going back to school

» Losing your job

Separate your business and personal finances

You may think of the money you have in your personal accounts—checking and savings, or other investments you may have—as assets available for your business.

While it's fine to use some of that money to fund your business, it's a good idea to think about your personal and business finances separately right from the start. Here are some tips to help:

  • Designate a chunk of money large enough to meet your business costs for a few months, and deposit it into a dedicated "business" checking account. The amount will depend on the type of business you're starting and how capital-intensive it is.
  • Consider getting a credit card solely for your business. Not only will it make tracking your business expenses easier, but many issuers offer cards with targeted incentives for business owners.
  • Look into business financing options, such as grants, loans, or even venture capital. The U.S. Small Business Administration (SBA) has extensive information about business funding options on its website.

Pick the right structure for your business

Businesses come in lots of different types, including—sole proprietorships, limited liability corporations (LLCs), partnerships, and corporations. Each type has different tax and financial implications.

Alisa Shin"Choosing the right structure for your business can help you protect your personal assets, especially if you have to deal with any business losses," said Alisa Shin, senior wealth planner for Vanguard Asset Management Services™. "Consult with an attorney or financial advisor to determine which structure suits your business." The SBA has a full list of business types and can also help you find local experts.

Take advantage of retirement savings options

As a business owner, you have some additional options available to help you save for retirement. You can choose from:

  • Small plan 401(k): This is a low-cost, full-service option available to a range of businesses, from start-ups to those with $20 million or more in assets.
  • Individual 401(k): Generous contribution limits apply to this type of plan, designed for sole proprietors or partners who have no common-law employees.
  • SEP-IRA: There's minimal paperwork needed to set up a SEP-IRA for small-business owners or the self-employed.
  • SIMPLE IRA: Businesses with 100 or fewer employees that want to maximize employee contributions may find this plan suitable.

Our plan comparison page can help you determine which type meets your needs. And as your business grows, you can revisit the comparison to see if it makes sense for your business—and for you—to change plan types.

You can continue to contribute to your individual traditional or Roth IRA as well. Of course, no matter what type of retirement plan you choose, keep saving. Money can be in short supply when you're starting your business, but continuing to contribute to your retirement savings—even if the amount is small—can help you build up that nest egg for your future.

And when you invest, follow our four investing principles: Stay focused on long-term financial goals; have an appropriate mix of stock, bond, and cash investments for your risk preference and time horizon; keep costs as low as you can; and maintain perspective even when headlines are raising your stress level.

Explore tax deductions

Did you drive to a meeting with a new client? Spring for lunch during the meeting? Dress for success with a new suit? You may be able to deduct all those expenses on your tax return. Check out the IRS website for more details on what you can write off—and what you can't.

The structure you choose for your business can affect your tax situation. For example, the obligations are different if you're self-employed and running a single-person shop than they are if you've got a small business with employees. The IRS small-business tax center can help you understand the differences and determine which structure makes sense for your business.

Sarah HammerAnother thing to consider to reduce taxes is making a gift of shares in your business to your favorite charity.

"When you donate appreciated assets, such as a stock that's grown in value, you don't have to recognize the long-term capital gain of that asset on your tax return," said Sarah Hammer, a senior investment analyst at Vanguard. The most common way to measure an asset's capital gain is by taking the fair market value of the investment and subtracting its original cost basis.

Develop an estate plan

When you own a business, having a sound estate plan makes sense—especially if you plan on passing along ownership of your business to others.

"Your estate plan is about making sure your assets are being distributed in the way you intend, that your estate has enough liquidity to pay any estate or inheritance taxes, and that your business can either continue after your death or is wound up appropriately (if your business will be closed)," said Ms. Shin.

It's a good idea to consult with a qualified estate planning attorney. You may also want to include a financial advisor or planner, insurance agent, or accountant in your decision-making process. A good estate plan, drawn up by an expert attorney, can save your heirs (and your business) a significant amount of time and money. At the very least, you'll want to have a will, living will, power of attorney, and other appropriate estate planning documents.

Here are a few questions to consider when you're developing your estate plan:

  • Will your business continue after you're gone? If so, what kind of succession plan do you envision? Are there family members who have the interest and ability to run or work for your business? Do you have employees to consider? What legal documents do you need to have in place for your succession plan?
  • Should your family or business have insurance on your life in order to buy your interest in the company should something happen to you?
  • Should you have life insurance in place to give liquidity to your estate to pay any estate or inheritance taxes?
  • Whom should your family contact (lawyers, accountants, business consultants) to get trusted guidance regarding the business?

Once you have your estate plan drawn up, experts—including Ms. Shin—recommend you review it every three to five years.

"A lot of people think that after they go to a lawyer to prepare a will and power of attorney, they simply sign it and they're done," said Ms. Shin. "But especially as your business—and your estate—grows, you'll want to revisit your plan regularly to make sure your estate has enough liquidity and your business has a suitable succession plan."

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest.
  • The information provided here is for educational purposes only and isn't intended to be construed as legal or tax advice. We recommend that you consult a tax or financial advisor about your individual situation.
  • Vanguard Asset Management Services are provided by Vanguard National Trust Company, which is a federally chartered, limited-purpose trust company operated under the supervision of the Office of the Comptroller of the Currency.
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