How Do We Plan? I’m a Small Business Owner and My Spouse Works in IT

Financial planning for a couple where one spouse is a business owner and the other works in a high-demand field like IT or Biotech involves unique challenges and opportunities. The small business owner's income might fluctuate, while the tech professional likely has stock options or equity compensation, adding complexity to long-term financial planning.

Here are some of the common opportunities we see with couples in this unique position.

Cash Flow: Needs and Stability

Many small-business owners do not have a stable income. Revenue and profits can fluctuate dramatically depending on the season or the year, which can make financial planning difficult. Our recommended strategies to help navigate this will depend on a variety of other factors.

• If cashflows are very unpredictable, it may be a good idea to plan using only the spouse’s income, setting aside some savings for future business investments if needed
• We generally recommend working to save 6-12 months' worth of business expenses in a high-yield business savings account to cover expenses for months with low or negative income
• For the more established small business owners, we often keep to our savings recommendations, but also generally advise that they pay themselves a modest salary. This helps provide income stability without posing a substantial threat to business operations during less profitable times
• Capitalize on profit sharing opportunities. We advise having a plan in place for how any profit share/bonus will be allocated, but generally advise against planning for a distribution until later in the year. Plan your lifestyle around your salary, and treat these as “extra” money

Tech professionals, on the other hand, generally have a substantial and consistent salary. However, these positions are often complicated with various forms of equity compensation and relatively frequent layoffs due to the economic cycles.

• A general recommendation is to keep 6-12 months’ worth of living expenses in a high-yield savings account to tide you and your family over in the event of a layoff
• We provide a very detailed and systematic approach to planning for your various forms of equity compensation. Whether we hold it, sell it, or do a combination will depend on the types of equity comp received, household income and tax status, current and future market expectations, and other factors

Defining Goals and Working Collectively Toward Them

This step is essential for any couple, regardless of their profession. However, it can be especially important regarding small business owners and equity-compensated employees. The Tech and Biotech industries are known for their high-salaries and generous benefits package, but they’re also well known for employees “aging out” and frequent layoff.

For small business owners, there’s the potential for unlimited profits and wealth. However, most small business owners spend so much time and energy trying to grow their business, that they have very little assets outside of that, and frequently struggle to sell it for their perceived value. They also are more sensitive to economic fluctuations and may be forced out of their business prematurely.

As a couple, you must decide what your goals are together, and potentially have some separate goals individually. Some general items to consider are:

• When do you want to retire or become financially independent? Do you want to continue to work part-time or odd jobs? Do you want to retire together?
• What are the plans with your small business? Will it be a hard-stop, or will you continue on with limited responsibilities? Do you want to sell for a lump sum, installment payments, or do you just plan to shut down?
• What’s your ideal lifestyle? Will you stay at your house, downsize, upsize, or move to an RV and travel?
• What will be your purpose? What will you do to maintain a feeling of relevance and importance, and prevent excessive boredom and depression?

Tax Planning

Let’s be honest, even basic taxes are tricky. Then you start to throw in business expenses, various forms of equity compensation, capital gains, alternative minimum tax (AMT), etc., and they can become just downright confusing. We definitely recommend working with a CPA if you’re not already.

Paying taxes is an inevitable part of life, but there may be ways to reduce the amount of taxes you pay over the course of your life. The best strategies for you will depend on your situation and your goals, but here are some things we help our clients consider:

• Is your current Entity Structure the most advantageous for your operations?
• Would establishing a qualified retirement plan make sense? If so, which one provides the optimal benefits?
• Is there potential for non-qualified retirement plans to really stack up the tax savings?
• Are Employer Stock Options being fully used and optimized?
• Should you make after-tax or pre-tax contributions, and would Roth Conversions be beneficial? What about Mega backdoor Roth contributions?
• Are you taking advantage of tax-loss harvesting opportunities? Have you minimized your non-qualified dividend income or switched holdings to provide more qualified dividends?
• Are you going to be subject to the alternative minimum tax (AMT) or net-investment income tax (NIIT) because of your equity compensation?

There are a plethora of opportunities that we will analyze and discuss with you to determine an ideal path forward. Those are just a few of the most common ways we help our clients save on taxes.

Diversifying Your Investments

If you’re the small business owner in the relationship, it’s likely that about 90% of your assets are tied to the business in one way or another. If you’re the tech/biotech spouse, you’re likely in a similar position. With salary, stock options, ESPP, deferred compensation, and retirement plans, it’s very common for individuals to be heavily invested in their employer. 

The risk of maintaining such concentrated positions is that there’s little that can be done in time if things take a turn for the worse. This is why it’s important to diversify away from your business and/or your employer, so you can Escape the Treadmill and work toward setting yourself up for a better future.

We typically recommend using qualified retirement plans to get the process started. Health Savings Accounts are also great for diversification if they’re available. One of the surprising winners for the diversification category is the taxable brokerage account. These accounts have minimal restrictions and very broad investment options, which allows you to invest in accordance with your objectives and beliefs.

Final Thoughts

Being in a power couple (business owner and IT/biotech) creates its own set of complex obstacles and exciting opportunities. We’ve only just scratched the surface here, but by going through Our Proven Process, we’ll get to learn more about you and your situation, and you’ll get a first-hand look at How We Help. Let us know what keeps you up at night, and we’ll work together to help put your mind at ease, and develop a strategy geared toward achieving your goals. For more tips for small-business owners, check out our Whitepaper!