EP Wealth’s Jon Moore, CFP^®, shares common tax planning mistakes business owners make and offers practical strategies to align tax decisions with long-term personal and financial goals. 

Essential Tax Planning Tips for Entrepreneurs and Business Owners 

In my work with business owners over the years, I’ve seen how entrepreneurial success can lead to growing complexity, especially when it comes to taxes. As businesses expand and generate more wealth, the range of available planning strategies also expands - but so does the risk of missing opportunities or making avoidable mistakes.

In this blog, I cover some of the most common tax-related missteps I’ve seen entrepreneurs and owners make, along with effective strategies for how to potentially avoid them. I’ll also discuss how working with an advisor can help you not only make tax-smart decisions, but also make sure those decisions are actually moving you toward the ultimate goal you have for your business.

Common Tax Mistakes Business Owners Make:

• Reinvesting all profits into the business without building personal liquidity
• Failing to revisit entity structure as the business evolves
• Overlooking continuity and succession planning
• Missing opportunities with tax-advantaged retirement plans
• Going into a sale without clear family goals or planning for wealth transfer

Mistake #1: Keeping All Wealth Tied Up in the Business

A business may be worth millions, or even tens of millions, but if the owner has never taken distributions or built up a personal balance sheet, they often find themselves in a highly concentrated and illiquid position. Nearly all of their net worth is tied to the value of the business, and everything depends on how that eventual sale unfolds.

Without financial independence outside the business, the owner’s ability to negotiate or delay a sale may be limited because there is no personal safety net. By contrast, when a client has already taken steps to move wealth out of the business and into personal accounts, they are often in a stronger negotiating position.

How to avoid this mistake and implement a stronger strategy

• Set a target for extracting earnings.
  A general rule of thumb is to take 10 to 20 percent of business earnings out each year. These distributions can help shift wealth to the personal side of the ledger, reducing concentration risk while keeping the business operating.
• Revisit how you pay yourself.
  In a sole proprietorship, all net profit is treated as taxable income. If the business is structured as an S-corp, for example, owners may be able to pay themselves a salary and take additional distributions. This can reduce self-employment tax on the distribution portion.
• Separate out hard assets when possible.
  Owners can consider moving assets like real estate into a separate legal entity. For example, the owner could establish an LLC that owns the building and then have the operating business pay rent to that LLC. This creates a new income stream for the owner’s family, and if the operating business is sold, the owner may choose to keep the building and lease it to the new owners.

Mistake #2: Not Reassessing Your Entity Structure

When a business first launches, it often starts as a sole proprietorship or a basic LLC. That structure may be appropriate in the early stages, but as the business grows, sticking with the original entity type can limit future options and create unnecessary tax exposure.

For example, if the entity isn’t structured in a way that’s attractive to investors or strategic buyers, it could complicate a future sale or limit the pool of interested buyers. In some cases, the wrong structure could lead to “double taxation”; this occurs when the entity remains as or switches to a C-corp without proper planning and profits are taxed once at the corporate level and again when distributed as dividends to owners.

Ways to avoid this mistake and implement a stronger strategy

• Reevaluate your structure as growth accelerates.
  As your business matures, consider whether your current entity type still makes sense. For example, moving from a sole proprietorship to an LLC, S-corp, or eventually a C-corp may provide different tax planning opportunities and affect how income is reported and distributed.
• Consider entity restructuring in advance of a sale.
  If it’s determined that the current entity type isn’t well-aligned with a potential exit strategy, there are tools available to help. One option is an IRS provision known as an F-reorganization, which allows you to restructure—such as converting from an S-corp to a C-corp, or LLC—without triggering immediate tax consequences. This can position the company more favorably depending on who the buyer is and how the deal is structured.
• Plan ahead for capital gains.
  Entity restructuring and sale planning are best done years in advance. That’s partly because many sales generate a large capital gain, and there may be opportunities to offset that gain by generating capital losses elsewhere. This could involve tax-loss harvesting from an investment portfolio or selling depreciated assets on the business’s books. But these steps require lead time and coordination.

Mistake #3: Failing to Establish a Documented Continuity Plan

One of the most significant risks I’ve seen is when a business owner has no formal plan for continuity. This includes not only succession planning for an eventual sale, but also planning for what happens if the owner becomes incapacitated or passes away unexpectedly.

Without a continuity plan, the business can quickly lose value, experience operational breakdowns, or even collapse.

As an example, I’ve worked with a family where the business was valued at over $3 million at the time of the owner's passing. But because no continuity plan was in place, within six months the value dropped to $125,000. Employees left. Customers left. No one had the authority to manage the transition. This kind of loss is heartbreaking to see, all the more so because it usually is preventable.

Ways to avoid this mistake and implement a stronger strategy

• Address operational authority, not just ownership.
  Continuity planning isn’t only about naming a successor. It involves practical, day-to-day considerations: Who can access business bank accounts? Who has the keys or login credentials? Who has legal authority to make decisions in the owner’s absence?
• Document your intentions, even if they seem obvious.
  In many cases, an owner expects a spouse, general manager, or family member to step in if something happens. But unless that person has legal authority through proper documentation, they may not be able to act. A well-run business can become paralyzed if no one is empowered to make decisions.
• Be realistic about family transitions.
  A business owner might expect their children to take over, but that expectation is not always discussed or realistic. If the children are still young—or not interested in running the business—a plan needs to be in place to bridge that gap. That could include placing the business in trust until the children are older or identifying interim leadership.
  
  

 Tax Planning Touches Every Part of Your Business Strategy

Mistake #4: Overlooking Better Retirement Plan Options

Business owners frequently underutilize the options available for qualified retirement plans. Early on, it’s common to see clients use traditional or SEP IRAs. As the business matures, they may move to a SIMPLE IRA or a 401(k). But as the company becomes more stable and cash flow becomes more predictable, there may be opportunities to sponsor more advanced plans that could potentially lower the company’s tax liability in high-earning years.

Ways to avoid this mistake and implement a stronger strategy

For businesses with stable and repeatable income, a defined benefit plan or cash balance plan may increase the deductible contributions available to the owner. These plans work more like pensions, and they typically allow much larger annual contributions than a 401(k) alone.

One trade-off is that the owner is also responsible for funding the plan for their employees. But in my experience, this has often worked out as a strong retention and recruiting tool. Pensions are rare in today’s workplace. When a small business offers a benefit like that, it can set them apart in a competitive market while also creating meaningful tax benefits.

Mistake #5: Entering a Sale Without Clear Personal and Family Goals

One of the most overlooked areas when it comes to a business sale is what the business owner and their family actually want to achieve from it.

Attorneys, accountants, and investment bankers are usually focused on getting the deal done. But no one may be asking whether the outcome aligns with the family’s long-term goals. That’s where our role as advisors becomes especially important.

Without that clarity, owners may, for example, agree to deal terms that tie them to the business longer than they intended, or give up control over branding and culture without fully understanding the buyer’s plans.

Ways to possibly avoid this mistake and implement a stronger strategy

• Clarify personal and legacy goals early.
  For example, if the owner is charitably inclined, part of the pre-planning might include transferring shares to a charitable vehicle prior to the sale. This can potentially eliminate the capital gains tax on that portion of the shares and create a deduction for the donor.
• Decide what kind of sale you actually want.
  There’s a difference between an internal transfer to family and a sale to key employees, a strategic buyer, or a private equity firm. Each option carries different tax, liquidity, and emotional considerations. I help clients weigh those trade-offs in the context of their personal goals, not just the business valuation.
• Plan for the transition timeline - and be realistic.
  Many owners say they’re open to staying on to help with the transition. But in practice, it can be difficult to watch someone else run the business. That’s why I often advise clients to be ready for the possibility of a full exit within six months of closing, even if the original thought was to have a longer transition.
• Include family governance and wealth transference in the planning process.
  Helping the next generation prepare for wealth, manage it responsibly, and engage with family governance is critical. In my experience, family wealth rarely makes it to the third generation. That’s not due to lack of resources, but lack of planning. Supporting those conversations is a core part of what we help clients do.

Helping Connect Tax Decisions to Long-Term Goals

Tax planning for business owners is not just about this year’s return. It touches every part of the financial picture, from how the business is structured, to how profits are used, to how wealth is transferred. The decisions made today can shape outcomes at sale and the legacy left behind.

When common pitfalls are avoided, owners might be able to put themselves in the best possible position to get the most out of their business. As a CERTIFIED FINANCIAL PLANNER^®, my privileged role is to help my clients take meaningful steps to manage their tax exposure while working toward the goals that truly matter to them and their families.

For more insights, contact a business planning advisor at EP Wealth.

DISCLOSURES

• EP Wealth Advisors, LLC. is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.
• Request an appointment with an EP Wealth Advisor when you have a minimum of $500,000 in investable assets – which includes qualified retirement plans (IRA, Roth IRA, 401(k), taxable brokerage, cash (savings / checking) and CDs. Investable assets do not include your home, vehicles, or collectibles.
• There is no guarantee or warrantee that a client or prospective client that engages EP Wealth Advisors, LLC in Business Planning services will experience investment success and does not ensure that a client or prospective client will experience a higher level of performance or results. No guaranty or warranty is made that any direct or implied service, offering, report, or analysis represented here will be offered or delivered. The services offered to clients will vary and depend on several factors.
• There is no guarantee that all the services detailed herein will be offered to a client. The services EPWA offers clients is dependent on the requirements of each client. In many instances, clients or prospective clients may not have a need for all or some of the services detailed.
• Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice. 
• Please consult with a CPA, tax professional, and/or attorney regarding your specific situation before implementing any of the strategies referenced directly or indirectly herein.
• Laws vary by state. The information presented herein is intended to be general in nature and may not apply to your state of domicile. Please consult local legal counsel to determine the best practices for your state.
• The information presented is hypothetical in nature and not reflective of a real client or scenario. There is no guarantee nor is the intention of this example to establish any sense of assurance, that, if followed, the strategies referenced here will produce a positive or desired outcome. In fact, there is no guarantee or warranty that any of the steps detailed will enable a positive outcome, successful or desired results. The intent of this hypothetical example is strictly for educational and illustrative purposes only.
• EP Wealth Advisors, LLC makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented. All expressions of option are subject to change without notice.