Tax Strategies for Founders

Founders face unique tax challenges and opportunities, especially regarding equity, stock options, and capital gains. If you’re not careful, poor tax strategies can cut into your profits and increase your liabilities.

Optimize your business structure for tax efficiency

One of the first decisions you’ll make as a founder is how to structure your business, but that decision needs regular review as your company grows. Whether running a C-Corp, S-Corp, or LLC, your business structure has significant tax implications.

For instance, as a founder of a C-Corp, your company may face double taxation — once on profits and again when dividends are paid to shareholders. On the other hand, an S-Corp allows profits and losses to pass through to your income, helping you avoid double taxation but requiring careful planning around how you pay yourself.

Choosing or adjusting your structure should involve careful tax planning, primarily as you issue stock options, attract investors, or plan for an exit. An expert tax advisor can help you decide if restructuring could reduce your tax liabilities and better align with your long-term goals.

Maximize deductions and credits to reduce tax liabilities

Founders can access various tax deductions and credits, significantly reducing their taxable income. Some of the most important deductions for you to take advantage of include:

• Start-Up Costs: To ease the financial burden in the early stages and deduct expenses such as legal fees, marketing costs, and initial business expenses.
• Home Office Deduction: If you work from home, you may be able to deduct a portion of your rent or mortgage, utilities, and other expenses.
• Research & Development (R&D) Tax Credit: If your company is developing new products or innovating processes, this credit can significantly reduce your tax liabilities.

You must track these deductions throughout the year and work with an accountant or tax advisor to maximize your savings while complying with tax laws.

Leveraging deferred compensation plans

Personal wealth is likely closely tied to the success of your business. This makes deferred compensation a powerful tool in your tax strategy. A deferred compensation plan allows you to postpone receiving a portion of your income or bonuses until a future date, ideally when your tax rate might be lower — such as after you sell the business or retire.

By deferring compensation, you reduce your taxable income in the present while securing funds for the future. These plans are beneficial if your company is scaling rapidly or you are preparing for an exit. With the help of a financial advisor, you can set up a deferred compensation plan tailored to your business’s growth trajectory and long-term financial goals.

Managing capital gains taxes

When you sell your company or portions of your equity, you’ll likely be subject to capital gains taxes on the profit from that sale. But with the proper planning, you can minimize your tax liabilities. We have helped founders successfully sell their businesses through an installment sale. While this method doesn’t allow access to the entire purchase price of the company immediately, it has allowed them to spread their tax liability over multiple years and, in some instances, helped avoid higher tax brackets in the year of the sale.

The Qualified Small Business Stock (QSBS) exemption is one of the most significant tax benefits for founders. If your company qualifies, you could exclude up to $10 million in capital gains from taxation when selling shares. To take advantage of this exemption, you must hold onto your stock for at least five years and ensure your business meets the IRS qualifications.

It’s also crucial to distinguish between short-term and long-term capital gains. Holding your stock for more than a year before selling can significantly reduce the tax rate you’ll pay on the gains.

Planning for retirement with tax-deferred accounts

It’s easy to put all your energy into growing the business and overlook retirement planning. However, setting up tax-deferred retirement accounts like a Solo 401(k), SEP IRA, Deferred Compensation Plan, or Roth IRA allows you to build personal wealth outside your company.

Contributions to tax-deferred accounts lower your taxable income in the year you contribute, while the funds grow tax-free until you withdraw them during retirement. If you’re reinvesting most of your profits back into the business, these accounts offer a way to grow wealth personally while reducing your current tax burden.

A financial advisor can help you determine how much you should contribute annually and which accounts offer the most tax benefits based on your current financial situation. By reducing your income through salary deferral, either to a retirement plan such as a Self-Employed 401(k) or SEP IRA, you can lower your income in the year of a sale to target certain income thresholds while setting yourself up to meet future financial obligations. There is also the ability to defer significant income levels into a Deferred Compensation Plan, which could lend itself to many other planning opportunities depending on how your business is structured.

Working with a comprehensive financial planning team will enable you to maximize your potential benefits while weighing the future tax liability of the large deferrals.

Tax-efficient exit strategies

Tax planning becomes even more critical when you’re ready to sell your business or step back from day-to-day operations. Stock sales are typically more tax-efficient than asset sales because they are subject to capital gains tax rates, often lower than ordinary income tax rates.

If your business owns real estate, you can also take advantage of a 1031 exchange, which allows you to defer capital gains taxes by reinvesting the proceeds from the sale into a new property.

An expert can help you structure the sale to minimize your tax liabilities, whether through stock sales, deferred compensation, or strategic reinvestments. We have worked with clients who owned C-Corporations and were able to minimize their capital gains by selling the business to their employees. To do so, they had to establish an Employee Stock Ownership Plan (ESOP) beforehand. They could roll the sale proceeds into an investment plan to defer capital gains and had the added benefit of not having to market the business to potential outside buyers.

Estate and gift tax planning for founders

Transferring ownership of your business or gifting shares to family members can help reduce the size of your taxable estate and ensure that your wealth is passed on efficiently.

Using trusts, gifting shares over time, and setting up family partnerships are all effective ways to lower the future tax burden on your estate. Early planning with a tax professional ensures you make the most of available exemptions and transfer wealth in the most tax-efficient way possible.

Tax planning is not just about reducing liabilities in the short term — it’s about creating a comprehensive strategy that maximizes wealth as your business grows, scales, or exits. Expert guidance is essential for navigating these complexities, optimizing your business structure, managing capital gains, and planning retirement.

Working with a tax professional or financial advisor can help you leverage every available strategy to minimize taxes and protect your wealth. This will allow you to focus on what you do best: building your business.

This content is provided for informational purposes only and should not be construed as individualized advice. For individualized advice, please consult with your adviser.