You’ve already done the hard part. After building a business and finding product-market fit, you’re now entering the thrilling and demanding stage of scaling. Suddenly, your company is growing, your team is expanding, and your revenue numbers are looking promising.
Here’s a question many entrepreneurs fail to ask: Has your wealth grown along with your business?
It’s a common paradox. Founders often invest every ounce of their energy, capital, and profits back into their businesses, mistaking their financial security for their company’s success. Though they may have a multimillion-dollar valuation, their finances are often tangled up in deferred salaries and high-interest debt.
Additionally, business owners face more financial volatility than non-business owners despite often having a higher income and wealth. Over 20% of them have experienced a significant drop in income since last year, and their income varies significantly month to month.
Moreover, small business owners are more likely to face unexpected expenses, late fees, and overdraft fees. The reason is not that they aren’t good with money; it’s because their financial life is tied to revenue streams that can come in season or out of season. It’s clear from this that building a successful business doesn’t mean building a stable personal financial life. To turn your business into a reliable and secure foundation for wealth, you need a systematic approach.
As you scale your business, building personal wealth isn’t a distraction — it’s a critical part of your long-term strategy. It’s about creating a financial foundation that protects you from business risk and allows you to make choices, not just professionally, but in every aspect of your life.
With that said, here are innovative strategies for turning business profits into sustainable personal assets.
Pay Yourself First and Fairly
During your early days, you may have sacrificed your salary to keep the lights on. For a founder, that’s a badge of honor. However, once your business has grown and is cash-flow positive, your thinking needs to change. If you continue in that pattern indefinitely, you would be making the biggest mistake of your life.
In addition to your hard work and leadership, your company’s profitability is a testament to your success. Now is the time to start rewarding them.
- Establish a market-rate salary. You shouldn’t just pay yourself a modest amount. Research the salary of a CEO or executive in a similarly sized company and base your salary on that. As a result, your company’s financials will look more professional to potential investors and provide you with a stable income. However, the accounting platform, Pilot, estimates that startup founders made $142,000 in 2024.
- Move to a consistent paycheck. Break the habit of withdrawing money from your business only when you need it. When you have a steady paycheck, your company is forced to operate on a predictable budget, and you can build a personal financial plan based on that income.
- The power of consistency. The benefits of having a predictable salary include the ability to automate your savings and investments. By setting up automatic transfers to a retirement account or a brokerage account, your business’s success can be converted into consistent personal wealth accumulation.
Separate Your Personal and Business Finances, Completely
It seems like a simple bookkeeping rule, but it’s the foundation for building personal wealth. It’s common for founders to see their company’s bank account as their own. This is a dangerous mindset.
The reason? When business and personal finances are mixed, liability is blurred. During a lawsuit or financial stress, your assets could be at risk. In this situation, founders are exposed to a real threat known as “piercing the corporate veil.”
The solution:
- Use separate accounts. Whenever a dollar belongs to the company, it should go through a business bank account. The rest is your money after you pay yourself a salary.
- Create your own “personal business.” Imagine yourself as a vendor for your company. When your company pays you for your services, you use the money to manage your personal “business” of life, from housing to food to investments. By shifting your mindset, you can more easily keep your boundaries firm.
- The ultimate goal. Ideally, your personal financial health should be independent of your company’s daily operations. As the company’s bank balance increases, so should your net worth.
Diversify Your Investments Beyond Your Business
For long-term wealth, this is perhaps the most crucial strategy. As your biggest asset, your business is also your biggest risk. In turn, it consumes all your time, energy, and a large portion of your net worth.
Ultimately, profits from the business are used to diversify and separate the founder’s personal portfolio.
Why is this essential?
- Risk mitigation. When your business has a bad year, a market downturn, or a catastrophic event, a diversified portfolio can be a vital safety net. As a result, a setback in one area won’t wipe out all your finances.
- Access to liquidity. Despite being rich on paper, a successful business may be cash-poor. If you need cash for an emergency, a home purchase, or your child’s education, you can’t just sell your company for cash. In contrast, a well-managed portfolio of stocks, bonds, or real estate provides liquidity and accessibility.
- Creating a legacy. Wealth isn’t just a single asset; it’s a portfolio of assets that generate income and can be passed on to future generations. To fund this diversified legacy, use your business as the engine.
How to diversify:
- Automate contributions. With a regular salary, you can automate your investments. Consider investing a portion of your monthly income in a brokerage account, self-directed IRA, or other investment vehicle.
- Explore passive income streams. Real estate, angel investments, or even royalties can be acquired from business profits and used as passive income assets. In addition to generating cash flow, these assets do not require active management.
Master Your Tax Strategy
As a founder, taxes are one of the biggest expenses and opportunities. If you fail to plan for them, you may lose personal wealth and hinder the growth of your business. To build wealth, smart entrepreneurs use tax planning.
Common tax traps:
- Ignoring estimated taxes. Throughout the year, you will owe taxes if your business is profitable. Putting off estimated quarterly taxes can lead to huge, unexpected bills and penalties that can adversely affect your cash flow.
- Poor corporate structure. A company’s legal structure, such as an LLC, S-Corp, or C-Corp, affects your personal taxation. Getting advice from a CPA or tax attorney early on can prevent you from overpaying.
- Missing out on deductions. Whether it’s business travel or home office expenses, there are countless legitimate deductions you can take advantage of to reduce your taxable income. In other words, you’re leaving money on the table if you don’t keep proper records.
Smart tax strategies:
- Work with a CPA. Don’t wait until tax season to file. Work with a CPA who understands your business model and can assist you with proactive tax planning.
- Leverage retirement accounts. You can reduce your taxable income while saving for your future with tax-advantaged retirement accounts such as a SEP IRA or a Solo 401(k). With these vehicles, you have the opportunity to compound wealth tax-free or tax-deferred.
- Plan for an exit. If you intend to sell your business one day, it’s essential to have a solid tax strategy in place. You can save millions of dollars by planning for the tax implications of a liquidity event over a multi-year period.
Get Your Personal Life in Order (Insurance and Estate Planning)
In the early stages of a business, a founder’s life can be a whirlwind of long hours and intense focus. As a consequence, personal matters can easily be put on hold. Nevertheless, protecting your personal life is a risk management strategy that protects everything you have worked for.
The essentials:
- Adequate insurance. You might have insurance for your business, but what about you? Having a robust health insurance plan, disability insurance, and umbrella policy is essential for protecting your personal wealth.
- Wills and trusts. In your role as a founder, your assets are complex and multifaceted. However, probating your business and personal assets without a valid will and trust can be very costly and time-consuming. If you have a family or multiple business partners, this is especially important.
- Create a legacy plan. Estate planning isn’t just for the ultra-rich. It’s about making sure your assets, both personal and professional, are passed down according to your wishes. Not only are your assets involved, but also your share of the company.
The Ultimate Goal: Freedom, Not Just Fortune
Developing a successful business is an enriching experience. However, the real reward is not just in the valuation; it’s in the financial freedom it provides. Intentionally building a personal financial foundation alongside your business allows you to create security, choice, and purpose in your life.
As long as you maintain discipline over your finances today, you can continue making those big, bold moves only founders are capable of.
Image Credit: Andrea Piacquadio; Pexels
