Protecting your wealth as a small business owner

One of the first steps in protecting your wealth is to separate your personal finances from your business, both financially and legally. If you’re operating as a sole trader or partnership, consider transitioning to a more protective structure, such as a Pty Ltd company or family trust. This business structure is a safer option, as it can shield your personal assets, such as your home and savings, from the business’s liabilities. This way, if the business ever faces a lawsuit or financial trouble, your home or personal savings are less likely to be at risk.

In day-to-day terms, separation also means keeping personal and business finances distinct. Use separate bank accounts and credit cards for business expenses, and avoid mixing them with personal funds. This isn’t just good record-keeping; it prevents confusion and helps you see clearly how the business is performing.

It also stops one side from compromising the other. For example, if your business experiences a rough patch, having your personal finances separate can ensure you still have a fallback and vice versa. Think of it as building a firewall: your business and personal wealth should support each other, not put each other at risk.

All business owners recognise the value of planning, and planning for the unexpected is a crucial element of your wealth protection strategy. Ensuring you have adequate and the right types of insurance cover is a critical consideration. If you fall ill or suffer an injury that keeps you off work for an extended period, it can be financially catastrophic and thinking it can’t happen to you is equally dangerous. This is where personal insurance, such as income protection, trauma coverage, or life insurance, comes into play. It can replace your income and support your family in the event of an unexpected occurrence. If you have business partners, consider key person insurance or a buy-sell agreement that is funded by insurance. This ensures the business, or your family, has funds to buy out shares or hire a replacement should one partner be unable to continue.

On the business side, ensure you have sufficient business insurance: public liability, professional indemnity, if applicable, property insurance for your assets, and even cyber insurance if you handle data. These policies transfer some of the financial risk to an insurer.

In addition to insurance coverages, it is wise to create a financial buffer for your business. Set aside an emergency fund or establish a line of credit while times are good. Many business owners learned the value of this during events like the COVID-19 pandemic; those with some cash reserves or access to funds got through tough months much more comfortably.

Successful entrepreneurs have a habit of reinvesting all their earnings back into their business. However, from a wealth protection standpoint, it’s crucial not to put all your eggs in one basket. Your business is one basket, a very important one; to protect your overall wealth, you should also grow other baskets on the side. In practice, this means diversifying your investments beyond the company.

Start by regularly taking some profits out of the business for your personal investments. Think of it as paying yourself first. You can invest in assets such as shares or property, which diversify your risk and generate alternative income streams. Diversification is essentially a form of self-insurance. If one asset, like your business, suffers, your overall wealth doesn’t collapse because other assets can carry the load.

Don’t forget about superannuation. Contributing to your super is a tax-effective way to build wealth outside your business. It also has the bonus of being generally protected from creditors, which provides an extra layer of security. By growing your super and other investments over the years, you’re making sure that not everything rides on the fate of your company. You’re creating personal wealth that’s separate, stable, and ready to support you in the long run.

When you’re pouring all your energy and money into a business, it’s easy to put your own retirement plan on the back burner. In fact, many small business owners reach their 50s or 60s and realise most of their wealth is tied up in the business. It might feel like your business is your retirement plan, but this can be a risky approach.

Start treating your retirement savings as a mandatory expense, like rent or payroll. Make regular contributions to your superannuation and other investment accounts, just as if you were an employee with your own “salary sacrifice” plan. This accomplishes two things: it builds a nest egg for the future, independent of your business, and it fosters good financial discipline. Over time, these contributions, even if modest at first, can grow significantly, thanks to compound interest and the favourable tax treatment super offers.

Consider the government incentives and schemes available to business owners. For example, when the time comes to sell your business, there are small business capital gains tax concessions that might allow you to put some sale proceeds into superannuation tax-free, subject to conditions. But you can only take advantage of such opportunities if you’ve planned.

Protecting your wealth also means thinking about the end game: your exit from the business, whether planned or unplanned. Having an exit strategy is like a will for your business, ensuring the wealth you’ve built is preserved and passed on in the best way possible.

If you intend to sell your business one day, start grooming it to thrive without you. A business that can operate smoothly without the owner’s daily involvement is far more valuable than one that entirely depends on you. This means developing a strong team, documenting processes, and building a broad customer base. Not only does this make the business more attractive to buyers, it also protects your wealth now. You can take holidays or handle personal issues without the business falling apart. In other words, you’re reducing “key person risk.”

If your goal is to pass the business to a family member or co-owner, open and honest conversations, along with proper legal agreements, are key. A formal succession plan will outline who takes over, under what terms, and how you, or your estate, gets paid for your share. Without such plans, even a close family business can face conflict or lose value during a transition.

Ensure your will and estate plans cover your business assets. It should be crystal clear what happens to your company shares or business property if you’re not around. We’ve seen cases where business owners didn’t leave instructions, and their families ended up in protracted legal battles or had to sell the business quickly for a fraction of its value. A bit of planning with your solicitor, including options like testamentary trusts or specific bequests for the business, can safeguard your legacy and protect your family’s financial future.

As a small business owner, you wear many hats, and “wealth protector” should be one of them. The strategies we’ve discussed in this article are all about preserving what you’ve built so far. By taking these steps, you’ll worry less about worst-case scenarios and focus more on what you do best: running a successful business and enjoying the rewards.

The team at First Financial comprises financial experts who help hundreds of Australians retire well and make informed, intelligent financial decisions. We cover everything from retirement and financial advice, investment and wealth management, superannuation and SMSF, insurance, tax, aged care, legal and lending services. Contact us for holistic and rounded financial management strategies.

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