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Hong KongBusiness owners: the client whose planning crosses every domain
A business owner appears in every domain at once - entity taxation, retirement plan selection, insurance and buy-sell funding, succession and estate liquidity. Case studies use them precisely because integration is unavoidable.
The business owner is the exam's favorite case study client, and the reason is structural: nothing about their situation can be answered inside one domain.
Where each domain reaches in
| Domain | The question it asks |
|---|---|
| Tax | Which entity, and how is income taxed |
| Retirement | Which plan, given employees and cash flow |
| Insurance | Key person, disability, buy-sell funding, liability |
| Estate | Succession, valuation, liquidity for taxes |
| Investment | Concentration - most of the net worth is the business |
| General principles | Business cash flow against household cash flow |
| Psychology | Identity, control, and reluctance to plan an exit |
The last row is genuine. Succession planning fails on unwillingness far more often than on technique.
Retirement plan selection
One of the most reliably examined business owner topics, because the answer depends on facts the question supplies.
- No employees, wants simplicity - a SEP IRA.
- Few employees, modest contributions, low cost - a SIMPLE IRA.
- No employees, wants maximum contribution - a solo 401(k), which permits both employee deferral and employer contribution.
- Older owner, high income, wants a very large deduction - a defined benefit or cash balance plan.
- Wants to favor the owner within limits - a plan design using permitted testing methods.
Read for the number of employees, the owner's age, the desired contribution and the tolerance for administration. Those four decide it.
Buy-sell agreements
Cross-purchase, where the owners buy each other out. Entity purchase or redemption, where the business buys the departing owner's interest. Or a hybrid.
Life insurance funds it. A cross-purchase between many owners requires many policies, which is the practical argument for an entity arrangement or a trusteed structure. Basis treatment differs between the two, and that difference is examinable.
For most owners the business is the majority of net worth, illiquid, undiversified and correlated with their own income. Every investment principle you know says reduce it, and the owner usually does not want to. Questions built on that tension want the recommendation, said clearly.
Estate liquidity
A large illiquid business interest can produce an estate tax bill with nothing to pay it from. Life insurance, often in an irrevocable trust, is the usual answer, and the tax code offers relief through instalment payment and redemption provisions for closely held businesses.
Knowing those exist, and roughly what they require, is enough for the exam.
Every dollar limit here is indexed annually and several were changed by recent legislation. Confirm the current figure against the IRS or the relevant authority before relying on it, and expect the exam to test the rule rather than the number.
Common questions
Why do business owners appear so often in CFP case studies?
Because nothing about their situation can be answered inside one domain. Entity tax, retirement plan choice, insurance, succession, estate liquidity and investment concentration all interact.
Which retirement plan suits a business owner?
It depends on employees, age, desired contribution and administrative tolerance - a SEP for simplicity, a SIMPLE for few employees, a solo 401(k) for maximum contribution alone, a defined benefit plan for a high-income older owner.
What is the difference between cross-purchase and entity purchase?
In a cross-purchase the owners buy each other out; in an entity purchase the business redeems the departing interest. The number of policies needed and the basis treatment both differ.
What is the concentration problem?
For most owners the business is the majority of net worth, illiquid, undiversified and correlated with their own income. Every investment principle says reduce it, and most owners resist.
How is estate liquidity handled?
Usually life insurance, often in an irrevocable trust, plus the tax code relief available to closely held businesses through instalment payment and redemption provisions.