Business Ownership vs. Index Investing: A Deeper Look at the Buss/Lakers Debate
A popular stat suggests indexing the S&P 500 would have been a better investment than Jerry Buss's purchase of the Lakers. This article dismantles that myth, revealing how the real math of leverage, cash flow, and tax efficiency tells a much different, and more profitable, story about building true wealth through ownership.
Why the viral stat about the Lakers' sale misses the point on how real wealth is built.
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There's a fascinating piece of financial trivia that often circulates among investors and sports fans alike. It lays out a simple, and seemingly mind-blowing, comparison:
At first glance, the takeaway seems simple: even owning a storied franchise like the Los Angeles Lakers couldn't beat a simple index fund. But for savvy owners, advisors, and executives, this comparison immediately raises red flags. It represents a fundamental misunderstanding of how strategic wealth is built, and it overlooks the immense financial and personal advantages of business ownership.
This article is for anyone who suspects there's more to the story. We’re going to go beyond the surface-level analysis and break down what the one-dimensional math ignores, from the real financial returns to the priceless advantages that ownership provides.
Key Takeaways:
IRR vs. ROI: When accounting for leverage and annual cash flow, the Lakers investment likely produced an Internal Rate of Return (IRR) more than double that of the S&P 500.
Tax Efficiency: Business owners can use before-tax dollars and deductions (like Section 179 and QBI) to significantly increase their financial efficiency compared to passive investors.
Priceless Returns: The true value of ownership includes non-financial returns like legacy, hands-on experience, and networking opportunities that an index fund cannot provide.
The Problem with the $13 Billion Number
Let me be clear: the S&P 500 is a fantastic investment tool, and its long-term performance is a powerful force for passive wealth creation. The problem isn’t with the index; it's with using it as a simplistic benchmark against a complex, multi-faceted asset like a business. The headline comparison falls apart under the weight of two realities that every business owner understands intuitively: Leverage and Cash Flow.
The Initial Investment Wasn't $67.5 Million in Cash
The first flaw in the comparison is the initial figure. Jerry Buss was a master of the deal. The $67.5 million transaction was for a portfolio of assets that included the Lakers (NBA), the Los Angeles Kings (NHL), The Forum arena, and a 13,000-acre ranch. More importantly, the deal was incredibly complex and highly leveraged. It involved multiple escrows, property swaps (including a transaction involving the Chrysler Building), and the efforts of over 50 lawyers. While the exact cash out of his pocket is not public, reports from the time estimated that Buss’s actual cash invested in the entire transaction may have been as low as $125,000, not including closing costs. Another analysis suggests his down payment was closer to $16 million. Let's be conservative and use the higher figure. If a $16 million investment grows into a stake worth billions, the return multiple is astronomical; far exceeding the S&P 500. This is the power of using leverage to control an asset, a tool unavailable to a typical index fund investor.
The Final Sale Price Ignores 45 Years of Income
The second, and arguably bigger, flaw is that the $10B valuation only represents the asset's value at the end. It completely ignores the decades of annual income the Lakers generated for the Buss family. The Lakers are a financial powerhouse. Even going back a decade, Forbes estimated the team's operating income for 2015 was $133 million. For the 2022-2023 season, their revenue was $516 million with an operating income of $159 million. This doesn't even account for the team's league-leading local TV deal with Spectrum SportsNet, worth hundreds of millions per year. While precise distributions are private, the publicly available data shows that the team generated billions in both revenue and profit over the Buss family's ownership tenure. That profit is money that could be enjoyed, reinvested in other ventures, or used to more quickly service the very debt that bought the team in the first place. This is why, for complex assets, a simple return multiple is the wrong tool. The only way to properly measure a deal like this is with a metric that accounts for all the cash flows (in and out) over the entire life of the investment: the Internal Rate of Return (IRR).
A Tale of Two IRRs: The Headline vs. Reality
The table below models the two approaches. The first column details the 'headline' scenario, which assumes an unlevered $67.5 million investment in the S&P 500. The second column models the more realistic 'reality' scenario of a leveraged $16 million investment in the Lakers, including estimated annual distributions.
The key takeaway is staggering. The Lakers ownership deal generated nearly an identical total net profit, but did so using less than a quarter of the initial capital and produced an IRR that was more than double that of the S&P 500.
The Money You Don’t See (Cash Flow & Perks)
The fundamental error in the "S&P is better" argument is its failure to recognize that a business is not a static number on a screen; it’s a living, breathing engine designed to generate income. The final sale price of an asset like the Lakers ignores the decades of cash flow produced along the way. This ongoing financial benefit generally comes in two forms: direct compensation and integrated perks.
The Annual Paycheck: Salary & Distributions
Unlike a passive stock holding, a profitable business pays its owner. For an active owner, this typically begins with a reasonable salary for the work they perform in the company. This is the reward for the day-to-day effort of running the enterprise. But the more significant reward comes from the profits. After all expenses are paid, including that salary, the remaining profit (the "net income") belongs to the owner and can be taken as a distribution (or dividend). This is the direct return on investment an owner receives for their capital and risk. This ability to generate cash without selling the underlying asset is a cornerstone of an owner's financial freedom
The "Lifestyle Asset": An Apples-to-Apples Look at Your Dollars
Beyond direct pay, the ability to run legitimate expenses through a business creates a massive financial advantage through the power of paying with before-tax dollars versus after-tax dollars. To show the real-world impact, let's create a clear, apples-to-apples comparison using only the 2025 federal income tax brackets for simplicity. Imagine two individuals: one is a high-income salaried employee, and the other is a business owner. Both need a new $80,000 vehicle. For an employee at this income level, their earnings for that purchase alone would place them in the 24% federal marginal tax bracket if they were to purchase the vehicle outright. This means the last dollars they earn, the ones they'd use for a large purchase, could be taxed at an even higher rate.
The Salaried Employee:
To have $80,000 in cash to buy the car, they must first earn that money and pay federal income tax on it. To get $80,000 of take-home pay, they would need to earn approximately $105,263. After paying 24% in federal taxes on those earnings (about $25,263), they are left with the $80,000 they need.
$105,263(Gross Pay)−$25,263(24%Federal Tax Owed)=$80,000(Net Pay)
The Business Owner:
The owner also needs an $80,000 vehicle, which will be used solely for legitimate business purposes. The business can purchase the vehicle directly. That $80,000 is a business expense. Thanks to tax provisions like Section 179 or bonus depreciation, the business may be able to deduct the full purchase price from its income in the first year. This deduction reduces the business's taxable income by $80,000, saving the company (and by extension, the owner) $19,200 in federal taxes (24% of $80,000).
The Bottom-Line Impact
To afford the exact same vehicle, the employee had to use $105,263 of their gross earning power. The business owner, by using their company as the purchaser of the vehicle, effectively only used $60,800 of their earning power ($80,000 cost - $19,200 tax savings). This isn't a loophole; it's a fundamental principle of the tax code designed to encourage business investment.
A Masterclass in Tax Efficiency
If cash flow is the engine of day-to-day wealth, then tax strategy is the high-performance oil that keeps that engine running at maximum efficiency. It's not about 'finding loopholes'; it's about strategically using a rulebook that is specifically designed to reward business investment and growth. For a business owner, the U.S. Tax Code provides a rich and dynamic playbook for legally minimizing tax liability. This advantage is built on three pillars: choosing the right foundation, understanding the full universe of deductions, and leveraging industry-specific opportunities.
The Foundation: Why Your Entity Structure is Your Financial Blueprint
Before a single dollar is earned, the most critical decision a business owner makes is choosing their entity structure. This choice dictates how profits are taxed, what deductions are available, and how the owner is compensated.
LLC (Limited Liability Company):
A popular starting point, the LLC is a legal entity (not a tax entity) that offers liability protection. Many sole proprietors will elect to have this treated as a "disregarded entity" for tax purposes, making filing simpler as it can all be done on their personal return: the 1040. As income increases, the next step is to choose how the entity is taxed.
S-Corporation (S-Corp):
For many profitable small businesses, the S-Corp is the gold standard of tax efficiency. It allows the owner to pay themselves a reasonable salary (subject to payroll taxes) and then take any additional profits as distributions. These distributions are not subject to self-employment taxes, which can result in thousands of dollars in annual tax savings compared to taking all compensation as salary.
C-Corporation (C-Corp):
The structure of major enterprises like the Lakers, a C-Corp is a separate tax-paying entity. While its profits are subject to corporate income tax, potentially leading to double taxation, it offers maximum flexibility for growth, raising capital, and providing more extensive, and deductible, employee benefits; many of which can also be additional forms of compensation for the owner.
The Universe of Deductions: Lowering Taxable Income Year After Year
Once the structure is set, owners can leverage a vast array of legitimate business expenses to lower their taxable income. We saw the power of this with the vehicle example, but it extends much further into building personal wealth.
A Deeper Dive: Super-Charging Retirement Savings
This is where your choice of entity becomes incredibly powerful. A primary example is in retirement savings. While a traditional employee might be limited to their company's 401(k), a business owner can establish plans with dramatically higher contribution limits. Let's look at the popular Solo 401(k) for an owner with no employees. For 2025, the savings potential is split into two parts:
The Employee Contribution: The owner acts as their own "employee" and can defer up to 100% of their salary, up to a maximum of $23,500 for 2025.
The Employer Contribution: The business then acts as the "employer" and can contribute up to 25% of the owner's compensation. The power is in combining them. The total contributions from both sources cannot exceed $70,000 for 2025. This allows a business owner to save nearly three times more in a tax-advantaged account than a typical employee, drastically reducing their current taxable income while accelerating their retirement goals. A SEP IRA is another strong option, consisting solely of employer contributions up to 25% of compensation.
This entire strategy is made possible by the salary and compensation structure you can create with the right business entity.
For owners looking to save even more aggressively, a Cash Balance Plan can be a powerful tool. This is a type of "private pension" that allows for massive, age-dependent, tax-deductible contributions that can often exceed six figures annually. These plans can also be used in addition to a 401(k), allowing for a stacked approach that can drastically reduce a high-income owner's tax bill while rapidly building wealth.
Other High-Impact Deductions
Beyond retirement, an owner has a toolkit of other powerful deductions to enhance financial efficiency:
The Qualified Business Income (QBI) Deduction: Also known as Section 199A, this is one of the most significant deductions available to owners of pass-through businesses (S-Corps, partnerships, sole proprietorships). It allows for a deduction of up to 20% of qualified business income directly from your taxable income. It's a complex deduction with limitations based on income level and business type, but for those who qualify, it's an incredibly powerful tax-saving tool.
Health Insurance Premiums: For self-employed individuals and S-Corp owners, the cost of health insurance premiums is often 100% deductible, turning a major personal expense into a significant tax deduction. For businesses electing to file as a C-Corp, the premiums for all employees are deductible to the business.
Asset Depreciation: This is a game-changer. When a business buys a significant asset: be it manufacturing equipment, computer hardware, or even a sports stadium; it can deduct the cost over time. Provisions like Section 179 and bonus depreciation often allow an owner to deduct the entire cost of an asset in the year it was purchased, creating a massive, immediate reduction in taxable income.
Industry-Specific Opportunities: It's Not Just for Sports Teams
Different industries also benefit from tailored tax incentives designed to encourage specific economic activities. This proves that tax advantages aren't just for billion-dollar franchises. Some examples are as follows:
Real Estate Investors: Beyond standard deductions, real estate professionals can use depreciation as a powerful tool to create losses that can offset other income. Advanced strategies like cost segregation studies can accelerate this depreciation, maximizing tax savings in the early years of owning a property.
Tech & Manufacturing: These industries can benefit from the R&D Tax Credit, a significant dollar-for-dollar credit for expenses related to innovation and improving products or processes.
Professional Services (Doctors, Lawyers, Consultants): For these owners, the primary advantage often lies in optimizing the S-Corp structure for salary and distributions and maximizing contributions to sophisticated retirement plans, like a defined benefit or cash balance plan, which allow for even larger, six-figure deductions.
The Priceless Premiums: Legacy, Experience, and Opportunity
If we stopped after the financial analysis, we would still be missing the most important part of the story: the elements of ownership that don't appear on a balance sheet but represent what is often the deepest forms of wealth. An index fund can give you a return. A business can give you a life. This "builder's premium" is a powerful form of return that manifests in three key areas:
The Legacy Asset: Building for the Next Generation
You cannot teach executive-level life skills by showing your children a brokerage statement. An entrepreneur creates an environment where the next generation can gain hands-on experience. When Jerry Buss passed away, he didn't just leave his children stock; he left them an empire. This is the ultimate goal for many entrepreneurs: creating a generational asset that provides purpose and opportunity not only for them, but those they most care about.
The Experiential Return: The 'Fun' Factor
A purely numerical comparison misses a simple, undeniable fact: the journey of building a business is often its own reward. The passion, the challenges, and the victories create a psychological income that can be more valuable than any financial return. The word "wealth" itself is derived from an Old English term for a state of being happy and healthy, not the financial riches that we often equate it with in modern times.
The Opportunity Network: Doors Opened and Deals Done
Owning a significant business creates a universe of opportunities that passive investing cannot. It puts you in rooms with other high-level operators, investors, and centers of influence. This network is, in itself, an asset that can lead to new ventures and strategic partnerships far beyond the scope of the original business.
Are You Building a Nest Egg or an Empire?
So, where does this leave our comparison? We've seen that the initial headline stat withers under scrutiny when you account for leverage, cash flow, and tax efficiency. The financial return on an asset like the Lakers is in a different universe than that of a passive index. But the analysis runs deeper. We've explored the benefits that can't be quantified: legacy, experience, and other opportunities.
The S&P 500 is an exceptional tool for building wealth passively. But it is just that: a tool. It is not an engine for creating a family legacy or a tax-efficient cash flow machine. To compare it to owning and building a business isn't just comparing apples to oranges; it's comparing a passenger train to a rocket ship. Both can move you forward, but they operate in entirely different dimensional planes with vastly different purposes.
Ultimately, your financial strategy must reflect what you are trying to build. If your goal is simply a number, a passive approach may be sufficient. But if you are building an engine for your family, for your life, for your future; you need a financial partner who understands that your business may be your most powerful asset. You need a plan that enhances its growth, not one that fights it.
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Frequently Asked Questions (FAQ)
Q: Is owning a business a better investment than the S&P 500? A: While the S&P 500 is an excellent passive tool, this analysis shows that a well-run business, utilizing leverage, cash flow, and tax advantages, can offer a significantly higher Internal Rate of Return and provides non-financial benefits like legacy and experience.
Q: What is the biggest tax advantage of an S-Corp? A: A primary advantage is the ability to pay yourself a "reasonable salary" and take remaining profits as distributions, which are not subject to self-employment taxes.
Q: What is the IRR? A: The Internal Rate of Return (IRR) is a financial metric that calculates an investment's profitability by accounting for all cash inflows and outflows over its entire lifetime, making it more accurate for complex assets than a simple return on investment.
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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
Fiduciary Financial Advisors does not give legal or tax advice. The information contained does not constitute a solicitation or offer to buy or sell any security and does not purport to be a complete statement of all material facts relating to the strategies and services mentioned.
How to Choose Your Business Structure: A Guide to Minimizing Taxes & Liability
Compare business structures like LLC, S-Corp, C-Corp, & more. Learn how each impacts your taxes, personal liability, and growth.
When you're building a business, the structure you choose isn't just paperwork: it has real consequences for how you're taxed, how much risk you take on personally, and how your business can grow. Whether you're just starting out or thinking about restructuring, it's worth understanding the core differences between the main types of business entities.
This guide will walk you through the most common business entity types: Sole Proprietorships, General Partnerships, LLCs, S-Corps, and C-Corps, explaining their key differences in liability, taxation, complexity, and suitability for various business stages. Our aim is to provide clear, actionable information to help you make an informed decision.
Sole Proprietorship
The sole proprietorship is the simplest and most common way to operate a business. If you’re running things solo and haven’t formally registered a business entity with your state, chances are you're already a sole proprietor by default.
Best for: Freelancers, individual consultants, or entrepreneurs testing a new, low-risk business idea who prioritize simplicity and minimal administrative burden.
The main upside here is simplicity in setup and taxes. There’s no need for formal registration beyond local licenses, and profits or losses are reported directly on your personal tax return, making tax filing relatively straightforward.
However, this simplicity has a significant drawback: unlimited personal liability. Because there's no legal separation between you and the business, your personal assets (savings, car, home…) are at risk if the business incurs debt or is sued. On the tax side, you’ll also pay self-employment tax (Social Security and Medicare) on the totality of your net income. There’s no legal way to split your income to reduce your payroll tax burden.
In short, sole proprietorships are fine for testing an idea or running a low-risk side hustle, but they can become a liability, literally, as soon as you grow.
General Partnership
If you’re going into business with someone else and don’t form an LLC or corporation, you’re likely operating as a general partnership by default. Like sole proprietorships, partnerships are pass-through entities, meaning the business doesn’t pay its own taxes. Instead, profits and losses flow through to the partners’ individual returns.
Best for: Two or more individuals starting a business together who prefer a simple operational structure and have a high degree of trust, while understanding the implications of shared and personal liability.
A partnership is easy to form, often just a handshake and an agreement will suffice, but that lack of formality can be dangerous. A critical vulnerability is operating without a clear, written partnership agreement. This document should explicitly detail ownership percentages, profit/loss distribution, responsibilities, and crucial procedures for dispute resolution, partner departure, or dissolution. Without it, disagreements over finances or business direction can quickly escalate into costly legal battles."
The biggest concern? Liability. In a general partnership, each partner is personally liable for the actions of the business, and for the actions of the other partners. One bad decision by your partner could financially wreck you. On the tax side, you’re also on the hook for self-employment taxes on your share of the profits.
Partnerships can work well when trust is strong and risk is low, but without a formal structure and legal safeguards, you may have unnecessary exposure.
(Continued Below Chart)
Single-Member LLC (Disregarded Entity)
For solo business owners who want simplicity and liability protection, the single-member LLC is a powerful option. Legally, an LLC (Limited Liability Company) is a separate entity from you as an individual, meaning your personal assets are protected if the business faces a lawsuit or debt collection as long as you follow basic corporate formalities. This includes keeping business and personal finances separate (e.g., separate bank accounts), and, depending on your state, may involve things like holding regular meetings or filing annual reports.
Best for: Solo entrepreneurs seeking robust personal asset protection combined with the simplicity of pass-through taxation and greater operational flexibility than a sole proprietorship.
From a tax perspective, the IRS treats a single-member LLC as a "disregarded entity" by default. That means the business doesn’t pay its own taxes; all profits flow through to your personal return just like a sole proprietorship. You still pay income tax and self-employment tax on all profits, but you gain legal protection, which is a major upgrade.
One of the best features of an LLC is its flexibility. As your business grows, you can choose to have the LLC taxed as an S Corporation or even a C Corporation, giving you more options for managing taxes. And since LLCs are recognized in all 50 states, they offer a good balance of legal protection and ease of use.
If you're serious about your business but not yet ready to take on the complexity of a corporation, a single-member LLC is often the smart move.
S Corporation (S-Corp)
Once your business is generating consistent profits, it might make sense to elect S-Corp status. The S Corporation (S-Corp) is not a distinct business entity itself, but rather a special tax election that an eligible LLC or C-Corp can make. Its primary attraction for profitable businesses is the potential for significant savings on self-employment taxes. As an S-Corp owner actively working in the business, you must pay yourself a 'reasonable salary,' which is subject to payroll taxes (Social Security and Medicare). However, any remaining profits can be taken as distributions, which are generally not subject to self-employment taxes.
Best for: Profitable LLCs whose owners wish to reduce their self-employment tax burden... and eligible C-Corporations seeking to switch to pass-through taxation to avoid double taxation on profits, provided they meet S-Corp ownership and operational requirements.
In an S-Corp, you pay yourself a reasonable salary, which is subject to payroll tax, and take the rest of the profits as distributions, which are not subject to self-employment tax. That can lead to significant tax savings once your profits justify the extra paperwork. Determining and documenting a 'reasonable salary' is crucial and should reflect what similar businesses would pay for comparable services. The IRS scrutinizes this, so it’s wise to research industry benchmarks or consult a tax professional.
You also get liability protection as long as you keep your business and personal finances separate and follow corporate formalities. But S-Corps come with rules: you're limited to a maximum of100 shareholders, all of whom must be U.S. citizens or residents, and you can only issue one class of stock. You’ll need to run payroll, file quarterly reports, and submit a separate tax return for the business.
If you’re earning more than you’d reasonably pay yourself in salary, and you want to protect your assets while legally reducing your tax bill, the S-Corp structure can be a great fit.
C Corporation (C-Corp)
Best for: Startups and larger businesses aiming to raise significant capital from external investors (like venture capitalists), offer stock options to employees, or plan for an eventual public offering, and that require maximum flexibility in ownership structure.
C-Corps are the go-to structure for startups that plan to raise money, issue stock, or scale aggressively. They offer the most robust liability protection, the most flexibility in ownership (no limits on the number or type of shareholders), and can retain earnings within the business for future investment.
The primary tradeoff for this flexibility and protection is potential double taxation. First, the C-Corp pays corporate income tax on its profits (currently a flat 21% federal rate). Then, if those profits are distributed to shareholders as dividends, the shareholders pay personal income tax on those dividends. While strategies exist to mitigate this, it’s a key consideration.
C-Corps also come with more complexity. You’ll need a board of directors, formal bylaws, annual meetings, and detailed records. You’re also more likely to need legal and accounting help on an ongoing basis.
For many small business owners, the C-Corp structure is overkill. But if you’re aiming to raise venture capital, issue employee stock options, or eventually go public, it’s the right vehicle.
There’s no one-size-fits-all answer when it comes to business structures. What works for a freelancer just starting out is very different from what makes sense for a tech startup looking to raise capital. For many solo entrepreneurs, starting as a single-member LLC and later electing S-Corp status provides a good balance of simplicity, protection, and tax savings. Partnerships need strong agreements and careful planning, and C-Corps should be reserved for businesses with big growth ambitions and complex funding plans.
The key is to choose a structure that aligns with your business's current stage, financial situation, and future ambitions. As your business evolves, your needs may change, and restructuring might become beneficial. I recommend reviewing your business structure periodically with legal and financial professionals to ensure it continues to serve your best interests.
Frequently Asked Questions (FAQ)
What is the cheapest business structure to set up?
Generally, a sole proprietorship is the cheapest and simplest, often requiring no formal state filing beyond local business licenses. LLCs typically have state filing fees but offer liability protection.
Can I change my business structure later?
Yes, you can change your business structure as your business grows or your needs change (e.g., converting an LLC to an S-Corp for tax purposes, or a sole proprietorship to an LLC for liability protection). This usually involves specific legal and tax procedures, and certain changes may have specific IRS rules or waiting periods before further changes can be made.
Do I need an EIN for my business structure?
You'll likely need an Employer Identification Number (EIN) if you operate as a partnership, LLC (in most cases), corporation, or if you plan to hire employees or open a business bank account, regardless of structure. But regardless on requirement, it is always advisable to operate your business with an EIN.
Which business structure offers the best tax benefits?
It depends on your profits and specific situation. Pass-through entities like sole proprietorships, partnerships, and standard LLCs avoid corporate-level tax. S-Corps can offer self-employment tax savings for profitable businesses but can be more expensive to file taxes and keep up with accounting. C-Corps have different tax implications and benefits, especially if reinvesting profits heavily.
How does liability protection work with an LLC or Corporation?
An LLC or corporation creates a separate legal entity from its owners. This means that, generally, the personal assets of the owners are protected from business debts and lawsuits, provided corporate formalities (like separate finances) are maintained. This is often referred to as the 'corporate veil.’
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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
Fiduciary Financial Advisors does not give legal or tax advice. The information contained does not constitute a solicitation or offer to buy or sell any security and does not purport to be a complete statement of all material facts relating to the strategies and services mentioned.
Making the Most of Cash Balance Plans: A Simple Guide for Business Owners
A cash balance plan helps business owners save more for retirement while lowering taxes. With higher contribution limits than a 401(k) and tax-deferred growth, these plans offer major financial advantages. Employers fund the plan, providing stable benefits for employees. While they require annual contributions and administration, the tax savings and wealth-building potential make them a smart choice for high-income professionals.
If you own a business and want to save more for retirement while paying less in taxes, a cash balance plan might be a great option. These plans may allow you to save more money than a regular 401(k) and offer major tax benefits.
What is a Cash Balance Plan?
A cash balance plan is a type of employer-sponsored retirement plan where the business makes annual contributions on behalf of employees. These contributions grow at a predetermined rate and are designed to provide a stable retirement benefit. Unlike traditional 401(k) plans, where employees contribute and take on investment risk, a cash balance plan ensures the employer funds the account and assumes the investment risk.
Key Benefits of Cash Balance Plans
1. Higher Contribution Limits
A 401(k) has limits on how much you can put in; $70,000 per year ($77,500 if you're 50 or older) for 2025. A cash balance plan lets you save significantly more, sometimes exceeding $300,000 per year, depending on age and income. This is especially helpful for business owners who want to accelerate their retirement savings and take advantage of tax-deferred growth.
Source: Joe Nichols, DWC - The 401(k) Experts.
2. Substantial Tax Savings
Source: Joe Nichols, DWC - The 401(k) Experts.
Contributions to a cash balance plan are tax-deductible, directly reducing taxable income. This is particularly valuable for high-income business owners looking to lower their annual tax bill. Additionally, the plan's assets grow tax-deferred, allowing for compounding benefits over time.
This video is an audible version of this article. Feel free to listen while reading, or watch it independently.
3. Enhanced Employee Retention and Satisfaction
Offering a strong retirement plan helps businesses attract and retain skilled employees. A cash balance plan provides a predictable benefit, making it an appealing option for employees seeking long-term financial security. Business owners who offer these plans often find that they increase employee loyalty and job satisfaction.
4. Flexibility in Plan Design
Cash balance plans can be customized to meet the needs of the business. Contributions can vary based on employee roles, tenure, or salary levels, allowing business owners to structure the plan in a way that best serves their financial and workforce goals. Additionally, these plans can be paired with a 401(k) for even greater retirement savings potential.
Challenges of Cash Balance Plans
1. Required Annual Contributions
Unlike profit-sharing contributions in a 401(k), which can be discretionary, cash balance plans require mandatory annual contributions. This means businesses need a consistent and predictable cash flow to maintain the plan over time.
2. Administrative Complexity
Cash balance plans involve more administrative work than traditional 401(k)s. Business owners must comply with government regulations, complete annual actuarial evaluations, and file IRS reports. Engaging a third-party administrator (TPA) is necessary to ensure compliance and smooth plan operation.
3. Funding Requirements
Since the employer is responsible for funding the plan and ensuring returns meet the guaranteed rate, market downturns could lead to additional funding obligations. For example; a plan with $1 million of accumulated benefits could experience an investment shortfall of 5% based on market performance. This would require an additional $50,000 of employer contributions on top of the annual contribution requirements. It should be noted that any losses may be amortized over a 15-year period.
Source: Joe Nichols, DWC - The 401(k) Experts.
4. Higher Setup and Maintenance Costs
Compared to 401(k) plans, cash balance plans typically have higher setup and maintenance costs. Employers must factor in administrative fees, actuarial costs, and investment management expenses when determining if the plan is a viable option.
Is a Cash Balance Plan Right for Your Business?
A cash balance plan is a powerful tool for business owners who want to accelerate retirement savings and take advantage of significant tax breaks. While these plans require mandatory contributions, careful planning can ensure long-term benefits that often outweigh the administrative and funding challenges. For high-earning business owners with a steady cash flow, a cash balance plan can provide a strategic way to maximize retirement savings while significantly reducing taxable income.
These plans are particularly beneficial for professionals such as doctors, lawyers, and consultants who have stable profits and seek to invest heavily in their future. By assessing your financial stability and working with experts, you can determine if a cash balance plan aligns with your long-term business and retirement goals while also offering valuable benefits to your employees.
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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
Fiduciary Financial Advisors does not give legal or tax advice. The information contained does not constitute a solicitation or offer to buy or sell any security and does not purport to be a complete statement of all material facts relating to the strategies and services mentioned.
Equity Compensation: Strategies for Business Owners and Executives
Discover strategies to maximize owner compensation, attract and retain key employees, and foster long-term business success with tailored incentives, equity-based rewards, and retention-focused programs.
Equity compensation: whether it’s stock options, restricted stock units, deferred compensation plans, or other incentives can be powerful for both wealth-building and as a tool to retain and grow top talent. For business owners and executives, it offers an opportunity to align your financial success with the growth of your company. But without a strategy, these rewards can quickly become a source of unnecessary complexity and risk.
Here we’ll explore key considerations for managing equity compensation effectively while highlighting strategies to minimize tax burdens and maximize long-term benefits.
Understanding Equity Compensation: A Quick Overview
Equity-based compensation comes in several forms, and each has its own rules and opportunities. Here are the most common:
Incentive Stock Options (ISOs)
Offer favorable tax treatment if you meet holding period requirements.
If sold too early, gains are taxed as ordinary income instead of capital gains.
Nonqualified Stock Options (NSOs)
Taxed as ordinary income at exercise, based on the difference between the exercise price and market value.
Any subsequent growth is subject to capital gains tax when sold.
Restricted Stock Units (RSUs)
Taxable as income upon vesting, with the stock’s market value determining the tax hit.
Holding shares after vesting exposes future gains to capital gains taxes.
Deferred Compensation Plans
Allow you to defer taxable income to a future date, ideally when your income—and tax rate—are lower.
Planning payout timing is critical to avoid high tax bills.
Net Unrealized Appreciation (NUA)
This is a strategy for 401(k) holders with company stock, where you can reduce taxes on the growth of your stock by shifting it from ordinary income to long-term capital gains.
Each of these compensation forms has the potential to have a lasting, positive effect on your wealth; but only if you navigate the accompanying tax and financial complexities strategically.
The Tax Factor: What You Need to Know
Taxes are the single biggest factor to consider when managing equity compensation. Poor timing can mean losing a significant portion of your rewards to tax liabilities. Here’s a simplified breakdown:
ISOs and AMT
Incentive Stock Options are a tax-friendly tool, but exercising too many in one year can trigger the Alternative Minimum Tax (AMT). Proper planning, like spreading exercises across multiple years, can help mitigate this.
RSU Vesting and Taxes
When RSUs vest, you’re hit with ordinary income tax on their full value. Depending on how frequently you’re issued RSUs and if your company stock is performing well, you may be tempted to hold onto those shares. But this could leave you overexposed to a single stock.
Deferred Compensation Risks
Deferred compensation allows you to kick taxes down the road, but you’ll need to carefully coordinate distributions with your broader income to avoid bumping into higher tax brackets. Additionally, depending on how the agreement is written, there may be additional risks such as if the company goes bankrupt, is sold, or employment separation isn’t in alignment with the terms of the agreement.
NUA Benefits
If you hold company stock in a 401(k), rolling it into a brokerage account under NUA rules lets you pay long-term capital gains rates on its growth instead of ordinary income tax rates often cutting your tax liability nearly in half.
Giving thoughtful consideration to your tax strategy ensures you’re making the most of what you’ve earned while keeping more in your pocket.
Strategies to Maximize Equity Compensation
Managing equity compensation isn’t just about taxes—it’s about using these assets to meet your broader financial goals. Here are three strategies to get you started:
Diversify to Manage Risk
As passionate as you may be about the outlook of your company, holding too much company stock ties your financial future to one asset, leaving you vulnerable even if the only risk couldn’t have otherwise been planned for. As soon as RSUs vest or you exercise stock options, consider selling to diversify your portfolio into other investments. This spreads risk while still allowing you to benefit from your company’s success.
Plan the Timing of Exercises and Sales
For ISOs and NSOs, timing is everything. Aim to exercise stock options in years when your taxable income is lower to minimize the impact. Similarly, holding shares long enough to qualify for long-term capital gains can significantly reduce the taxes you pay on appreciation.
Leverage Tax-Advantaged Strategies
Tools like deferred compensation and NUA are underutilized opportunities to save on taxes. Deferred comp payouts scheduled during retirement years, when your income is typically lower, can make a huge difference. Likewise, using NUA rules for company stock in your 401(k) can transform a steep tax bill into manageable long-term capital gains.
The Bigger Picture
Equity compensation is about more than just growing wealth. It’s about aligning your decisions with your long-term financial goals. Whether you’re a business owner structuring a succession plan or an executive navigating your compensation package, the right strategy can help you turn potential into reality.
That said, equity compensation is rarely one-size-fits-all. Your strategy should account for your risk tolerance, income level, and long-term goals. A financial advisor can be a valuable partner in navigating these complexities, helping you optimize your decisions at every step.
If you’re ready to take the next step in managing your equity compensation, start by evaluating your current position and identifying opportunities to optimize. And remember thoughtful planning today lays the foundation for tomorrow’s success.
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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
Fiduciary Financial Advisors does not give legal or tax advice. The information contained does not constitute a solicitation or offer to buy or sell any security and does not purport to be a complete statement of all material facts relating to the strategies and services mentioned.
Connelly v. United States: What it May Mean For Your Business
The Supreme Court's Connelly decision reshapes estate planning and buy-sell agreements for business owners.
Last month I spoke to the importance of a buy/sell agreement amongst business owners. To continue that conversation, the recent Supreme Court decision in Connelly v. United States has given even more for small business owners to consider. The case has significant implications that extend well into the owner’s estate planning, and it should prompt them to reconsider how they handle succession plans and ownership structures, especially when buyout agreements are involved. In this article, we’ll break down the key lessons from this case and how they could affect your business.
A Quick Look at the Connelly Case
In Connelly v. United States, the Supreme Court addressed the valuation of life insurance proceeds used in business buyouts, specifically for estate tax purposes. The case involved two brothers, Thomas and Michael Connelly, who co-owned Crown C Supply, a closely held C corporation. They had a buyout agreement in place that allowed the company to redeem the deceased brother’s shares using life insurance proceeds. The crux of the legal dispute was whether those life insurance proceeds should be included in the company’s value for estate tax purposes.
The IRS contended—and the Court agreed—that life insurance proceeds used for this kind of buyout must be counted as a corporate asset when determining the value of the business. This decision increases the taxable value of estates in similar situations and has several important consequences for business owners, especially those relying on life insurance-funded buyouts.
What This Ruling Means for Small Business Owners
If you’re a small business owner or operate a closely held company, Connelly raises serious questions about how buyout agreements are structured and the role of life insurance in those agreements. For many, this decision should serve as a wake-up call to reassess existing plans. Here are some key areas that deserve your immediate attention:
Reevaluate Your Buy-Sell Agreement
Buy-sell agreements are designed to ensure business continuity when an owner passes away or exits the business. In many instances, life insurance policies fund these agreements, with the company using the proceeds to buy out the deceased owner's shares. Prior to Connelly, many business owners believed that the obligation to redeem shares would offset the life insurance value when calculating the company's estate tax valuation. That’s no longer the case.
What you should consider: If your current buy-sell agreement is structured as a redemption agreement (where the business purchases the shares), you could face a higher estate tax bill than anticipated. Now might be the time to explore restructuring your agreement into a cross-purchase plan. In this structure, surviving owners directly purchase the deceased owner's shares, with life insurance proceeds going to them, not the company—thus avoiding an increase in the company’s valuation for tax purposes.
Review Your Estate Plan
The Court’s decision underscores that life insurance proceeds—even when earmarked for business continuity—are considered part of the business’s taxable value. This could dramatically alter the estate planning outcomes for business owners who have carefully crafted their plans to minimize tax burdens.
The estate tax exemption is set to decrease significantly in 2026 as the Tax Cuts and Jobs Act (TCJA) sunsets, and many states have even lower thresholds than the federal government. This ruling could make the difference between owing estate taxes or avoiding them altogether.
What you should consider: Now is a great time to work with your estate attorney to reassess your plan. If life insurance is part of your business’s buy-sell structure, consider whether a cross-purchase arrangement or a trusteed buyout might offer better protection from the kind of tax exposure highlighted in Connelly.
Prepare for Broader Financial Implications
The valuation changes resulting from Connelly aren’t limited to estate tax—they could affect your business’s financial health as well. Increasing the company’s value due to life insurance proceeds could put unexpected pressure on liquidity and cash flow. If your heirs are forced to sell assets or take on debt to cover an unanticipated tax bill, the future stability of your business—and your intended legacy—could be at risk.
What you should consider: You may want to consider purchasing additional personal life insurance to cover potential estate taxes resulting from a redemption agreement. Alternatively, you might explore restructuring the business to protect its value through trusts or family-owned LLCs, which are designed to limit estate tax exposure.
Cross-Purchase Arrangements: A Smarter Option?
One of the biggest lessons from Connelly is that cross-purchase arrangements, where individual owners hold life insurance policies on each other, may offer better protection against valuation complications. With a cross-purchase arrangement, the business’s value remains insulated from life insurance proceeds, and surviving owners receive a stepped-up basis in the shares they purchase.
What you should consider: If your business has multiple owners, a cross-purchase agreement may be a more attractive option than a redemption agreement. While cross-purchase plans can be more complex to manage—especially as the number of owners increases—they can offer significant tax advantages over time. Just keep in mind that each owner will need to hold policies on the others, which can complicate the arrangement.
The Bottom Line
The Connelly decision is a reminder of how critical it is to keep a close eye on the structure of your business succession plans. For closely held businesses that rely on life insurance to fund buyouts, the landscape has shifted in ways that could have serious financial repercussions.
Now is the time to review your buyout or succession planning agreements. Determine whether a redemption or cross-purchase arrangement is the best fit for your business, and make sure your estate planning documents reflect the current legal and tax environment. While Connelly may not be the final word on these matters, it’s a clear call for business owners to be proactive and thoughtful about how they plan for the future.
Smart planning today will go a long way in protecting your business and ensuring your legacy.
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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
Fiduciary Financial Advisors does not give legal or tax advice. The information contained does not constitute a solicitation or offer to buy or sell any security and does not purport to be a complete statement of all material facts relating to the strategies and services mentioned.
Protecting Your Business’s Future: The Critical Role of Buy/Sell Agreements
For business owners, the importance of buy/sell agreements cannot be overstated. These contracts are designed to protect both the business and its owners by setting clear guidelines for ownership transitions in case of unforeseen events such as death, disability, or retirement. Without such an agreement, businesses can face severe disruptions, leading to internal disputes or financial strain.
A buy/sell agreement helps ensure that ownership changes are handled smoothly by defining how shares will be sold and at what price. More importantly, it prevents the business from falling into the hands of unintended parties, like an owner’s ex-spouse or an outsider who could negatively impact the company’s operations.
By incorporating key provisions such as purchase price determination and funding mechanisms, buy/sell agreements give businesses a solid foundation for navigating ownership transitions, ultimately protecting their long-term success.
Business owners should strongly consider buy-sell agreements to safeguard the interests of both the business and its owners. These agreements are invaluable in setting clear guidelines for ownership transitions in various situations, from unforeseen events to changes in business dynamics. They typically cover:
Regulation of the owners' relationships
Management of the business
Transfer of ownership interests
Privileges and protections for owners
Buy/sell agreements help mitigate risk by preparing for unexpected events, ensuring business continuity, and avoiding costly disputes that can arise without proper planning. Let’s dive into the key components of buy-sell agreements, triggering events, and methods for determining a purchase price.
Triggering Events in Buy/Sell Agreements
Buy/sell agreements are activated by specific "triggering events" that require the sale or transfer of an ownership interest. These events typically fall into three categories, each representing a potential risk to the business:
Third-Party Sale Triggers
Business owners are often concerned about a potential sale to outsiders, as a new owner could disrupt the company’s decision-making process. To prevent unwanted transfers, such as shares falling into the hands of an ex-spouse following a divorce or creditors following bankruptcy, buy/sell agreements often include protections against third-party sales.
Owner Viability Triggers
An owner's physical or mental incapacity can impact the smooth operation of a business. Buy/sell agreements ensure that the company has a plan in place to manage ownership transitions in the case of death or disability. In many cases, the agreement may also outline the use of life or disability insurance as funding mechanisms for the buyout.
Relationship Severance Triggers
When an owner leaves the company, whether through resignation, retirement, or termination, it can create complications for the remaining owners. A buy/sell agreement mitigates this risk by defining the terms for how shares will be handled, preventing a former owner from joining a competitor or disrupting the company's future.
Key Provisions in Buy/Sell Agreements
A well-structured buy/sell agreement should include provisions that address potential challenges and outline clear solutions. These provisions help ensure a smooth ownership transition:
Purchase Price Determination
Methods for determining the purchase price can vary. Common approaches include:
Fixed price (e.g., book value)
Agreed-upon formula (e.g., multiple of earnings)
Agreed-upon methodology (e.g., market-based)
Third-party appraisal by a qualified business appraiser
Restrictions on Transferability & Rights of First Refusal
To protect existing owners' interests, buy/sell agreements may restrict the transferability of shares. This provision ensures that owners cannot sell their shares to outsiders without first offering them to other owners or the business itself.
Employment & Non-Compete Clauses
These provisions help protect the business from former owners who may attempt to start a competing company after leaving. The agreement can restrict such actions, safeguarding the company's market position.
Call & Put Options
Call and put options allow owners to buy or sell shares at a predetermined price, giving them control over the timing and terms of ownership changes.
Funding & Terms of Purchase
Buy/sell agreements often specify how the buyout will be funded, such as through insurance proceeds, company profits, or loans. This ensures the transaction is financially manageable for all parties involved.
Types of Buy/Sell Agreements
There are several types of buy/sell agreements, each with its own advantages depending on the business structure and ownership:
Cross-Purchase Agreements
In a cross-purchase agreement, individual owners purchase life insurance policies on each other. Upon a triggering event, the remaining owners buy out the departing owner’s shares.
Pros: Owners maintain control over their shares; favorable tax treatment for surviving owners.
Cons: Becomes complicated with multiple owners due to the number of policies required.
Entity-Purchase Agreements (Stock Redemption)
In this arrangement, the business itself buys the departing owner’s shares, using a single insurance policy on each owner.
I’ll be discussing this in greater detail next month as the Supreme Court has just issued a ruling that affects how entity purchases are taxed moving forward.
Combination of Third-Party & Business Purchase Arrangements
This hybrid address both cross-purchase and redemption arrangements and may provide right of first refusal provisions for the remaining owners and the business.
Pros: Offers flexibility to decide at the time of the event; suitable for changing business circumstances.
Cons: More complex to structure and manage due to the number of options available.
More on Methods to Determine the Purchase Price
Valuing a business for a buy/sell agreement is essential and can be approached in several ways:
Fixed Price
A simple approach where the owners agree on a fixed price for the shares. However, this method may become outdated quickly if not regularly updated to reflect changes in business value.
Agreed-Upon Formula (e.g., Book Value or Multiple of Earnings)
Formulas offer a straightforward method of valuation, such as using a multiple of the company's earnings. This method is low-cost but can oversimplify the valuation process, potentially leading to inaccuracies.
Agreed-Upon Methodology (Market-Derived)
This method employs an agreed-upon market-based valuation approach to calculate the price. It provides more accurate results than formulas, particularly for businesses that undergo rapid changes in value.
Appraisal by a Qualified Business Appraiser
An appraisal performed by a third-party expert can ensure an accurate and fair valuation. While this is often the most reliable method, it can be time-consuming and expensive.
A well-crafted buy/sell agreement is crucial for any business with multiple owners. It provides a clear plan for ownership transitions, helps protect against unexpected events, and ensures fairness for all parties. Whether you opt for a cross-purchase, entity-purchase, or a combination of both, having a buy/sell agreement in place will help secure the future of your business and avoid costly disputes.
It’s essential for business owners to work closely with legal and financial professionals to tailor the agreement to their specific needs, ensuring it is regularly updated as the business grows and changes.
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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
Fiduciary Financial Advisors does not give legal or tax advice. The information contained does not constitute a solicitation or offer to buy or sell any security and does not purport to be a complete statement of all material facts relating to the strategies and services mentioned.
A popular stat suggests indexing the S&P 500 would have been a better investment than Jerry Buss's purchase of the Lakers. This article dismantles that myth, revealing how the real math of leverage, cash flow, and tax efficiency tells a much different, and more profitable, story about building true wealth through ownership.