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- Avail Investment Partners
- 24 hours ago
- 7 min read
Introduction
For most founders, concentration is not an accident. It is the strategy that built the business.
In the early years of building a company, focus is paramount, with nearly every dollar reinvested into expansion, talent, and infrastructure to drive growth. At that stage, diversification often feels premature, even counterproductive, because concentrated effort is what fuels momentum.
As a business matures and begins generating $300,000, $600,000, or even $1 million in consistent annual profit, the nature of risk begins to shift. The primary concern is no longer survival, but exposure, particularly the concentration of income and net worth in a single asset.
For many profitable pass-through business owners, most of their personal net worth remains tied to a single operating company. Annual income and enterprise value move together. If revenue declines, both personal cash flow and long-term wealth are affected simultaneously.
The owner may have no desire to sell, and the business itself may be healthy, profitable, and growing, yet the underlying financial structure often remains heavily concentrated in that single enterprise. At this stage, diversification is not an expression of pessimism about the company’s future, but rather a deliberate effort to build durability into the personal balance sheet, shifting the objective away from immediate liquidity and toward long-term optionality.
The Structural Reality of Pass-Through Ownership
Pass-through entities, including S-corporations, partnerships, and LLCs taxed as partnerships, offer meaningful advantages to business owners, particularly because income flows directly to the individual return and avoids the double taxation imposed on C-corporations. This structure also preserves planning flexibility, allowing owners to adapt compensation, distributions, and tax strategies as profitability evolves.
However, this same structure pushes meaningful income onto the owner’s personal return each year. For high earners, that often results in significant annual tax exposure.
At the same time, enterprise value typically remains illiquid. Unlike publicly traded securities, ownership interests in private businesses cannot be partially liquidated with ease.
The result is a familiar profile:
High annual income
Strong enterprise value
Limited diversification
Concentrated exposure
Institutional investors rarely operate this way. Endowments, pension funds, and family offices allocate capital intentionally across public markets, private investments, fixed income, and real assets to reduce correlation risk and improve long-term durability (1).
Founders, by contrast, often hold:
One private operating company
Minimal liquidity
Limited exposure to unrelated asset classes
As profitability stabilizes, the risk shifts from business performance to personal concentration.
Redefining Diversification for the Founder
Diversification for a business owner does not require selling the company, abandoning conviction in its future, or surrendering control of operations. Instead, it requires a thoughtful separation between the role of the business as a growth engine and the role of the personal balance sheet as a source of long-term financial stability.
The business functions as an active growth engine, designed to reinvest capital and pursue expansion, while the personal balance sheet should serve as a stabilizing structure that protects and preserves accumulated wealth. The transition from operator to allocator therefore begins not with an exit, but with the disciplined extraction and thoughtful redeployment of profit beyond the company.
Building Diversification Through Retirement Infrastructure
One of the most effective tools available to profitable pass-through owners is qualified retirement plan funding.
Business owners may make substantial tax-deferred contributions through properly structured retirement plans, reducing current taxable income while building protected assets outside the operating entity (2).
For many owners, the first layer is a 401(k) with profit-sharing. For those with higher and more consistent income, particularly individuals over 40, layering a cash balance plan can significantly increase annual deductible contributions (3).
Cash balance plans are legally structured as defined benefit plans but communicate benefits as account balances. Contribution limits increase with age and compensation levels. In many cases, annual contributions can exceed $150,000 and may surpass $300,000 depending on plan design and actuarial calculations (4).
Consider a 52-year-old owner generating $750,000 in annual profit. By combining a fully funded 401(k) with a properly designed cash balance plan, total deductible retirement contributions could exceed $300,000 annually.
At higher marginal tax rates, this strategy may reduce current federal tax liability materially while shifting capital from concentrated operating exposure into diversified, creditor-protected retirement assets.
The business remains fully intact and under the owner’s control, but the process of personal diversification has begun.
Converting Risk Into Capital: Captive Insurance Structures
Mature businesses frequently retain significant deductibles and absorb predictable operational risks internally. In certain circumstances, formalizing those risks within a captive insurance structure may create a secondary capital pool outside the operating company.
When structured properly, premiums paid by the operating business may be deductible as ordinary business expenses, provided the arrangement reflects genuine risk transfer and insurance mechanics (5).
Small insurance companies that meet specific requirements may be taxed only on investment income rather than underwriting profit, subject to strict compliance standards (6).
However, regulatory oversight has increased in recent years. Improperly structured micro-captives have been subject to heightened IRS scrutiny and reporting requirements (7).
When economically justified and compliant, a captive can function as follows:
The operating company pays premiums to a licensed insurance entity.
The captive retains underwriting profit and invests reserves.
Over time, reserves accumulate outside the operating entity.
Captive structures are not appropriate for every business and require careful actuarial and legal review, but for profitable enterprises with measurable, insurable risks, they may provide a mechanism to transform operational exposure into structured capital accumulation.
Partial Liquidity Without Full Exit
Diversification does not require selling the entire company. In many cases, partial liquidity can materially reduce concentration risk while preserving operational control.
Minority recapitalizations, installment sales, and structured buy-sell arrangements funded with life insurance may allow owners to convert a portion of enterprise value into diversified capital without relinquishing leadership (8)(9).
Even a modest liquidity event (20 to 30 percent of ownership) can meaningfully alter a founder’s financial profile.
The psychological impact is significant. Once personal net worth is no longer entirely dependent on a single asset, decision-making often becomes more patient and strategic. Optionality increases the moment full concentration disappears.
Allocating Capital Beyond the Business
Extracting capital from the business is only the first step. The second, and often more important, decision is where that capital should be allocated.
For many profitable founders, retirement plans provide meaningful tax deferral and creditor protection. However, those assets are generally inaccessible without penalty until later in life. They serve an important purpose, but they do not solve the need for near-term optionality.
A taxable brokerage account plays a different role. Unlike qualified retirement accounts, assets held in a taxable account are fully accessible at any time. There are no age restrictions, no required minimum distributions, and no early withdrawal penalties. Capital can be redeployed, invested, gifted, or used for strategic opportunities without structural friction.
For founders who do not want to sell their business but want to reduce concentration risk, a taxable brokerage account becomes a reservoir of independence. It allows capital to compound outside the operating entity while remaining liquid and available.
Liquidity is not merely about the ability to spend capital, but about the strength and flexibility it provides in making strategic decisions. An owner with $3–5 million in diversified, liquid assets outside the business makes different decisions than an owner whose entire net worth is embedded in enterprise value. Liquidity reduces urgency, fosters patience, and ultimately expands optionality.
Beyond access, taxable brokerage accounts also offer strategic tax advantages that are often overlooked.
Tax-Loss Harvesting and Long-Term Planning
In a diversified taxable portfolio, market fluctuations create both gains and losses. While gains are taxable when realized, losses can be harvested, meaning securities trading below cost basis are sold to realize a capital loss while maintaining similar market exposure through reinvestment in comparable assets.
Realized capital losses can offset capital gains dollar-for-dollar. If losses exceed gains in a given year, up to $3,000 of excess losses may offset ordinary income, with additional losses carried forward indefinitely (10).
For founders, this creates a long-term planning opportunity. Over time, a disciplined investment strategy in a taxable account can accumulate realized capital losses during periods of market volatility. Those losses may not be immediately necessary, but they become valuable in the future.
If the owner eventually executes:
A partial sale of the business
A full liquidity event
A sale of highly appreciated real estate
Disposition of concentrated investment positions
Previously harvested capital losses can offset a portion of those gains, reducing the overall tax burden.
This strategy is not immediate, as it requires time, market cycles, and disciplined portfolio management for losses to accumulate meaningfully. However, when paired with a future liquidity event, those accumulated losses can materially reduce the resulting tax impact.
A taxable brokerage account is not simply a place to “park money.” It is a flexible, strategic asset pool that can:
Provide full liquidity
Compound capital outside the business
Generate tax-efficient growth
Accumulate losses to offset future gains
For profitable founders who do not intend to sell immediately, consistent annual allocations into a diversified taxable portfolio may represent one of the most straightforward paths toward meaningful optionality.
Over five to ten years, disciplined reinvestment of surplus profit into a taxable account can build a significant pool of liquid capital that is readily accessible, flexible, and strategically positioned for future decisions.
The business remains the primary growth engine, but it is no longer the only source of financial strength.
A Practical Illustration
Consider a 50-year-old S-corporation owner generating $1,000,000 in annual profit with no immediate intention of selling.
In the first year, the owner implements:
Fully funded 401(k) and profit-sharing plan.
$250,000 cash balance contribution.
$300,000 allocation to a diversified taxable investment portfolio.
A feasibility review for captive insurance.
Approximately $600,000 of capital is transferred outside the operating entity without reducing ownership.
Assuming similar profitability over five years, the owner could accumulate more than $3 million in diversified assets while retaining 100 percent control of the business.
Conclusion
Concentration was instrumental in building the business, and in many cases, it was both necessary and entirely rational during the growth phase. However, as profitability stabilizes and personal net worth increases, that same concentration gradually shifts from being a strategic advantage to becoming a structural vulnerability.
Diversification does not require an exit, but it does require deliberate intention and planning. When a founder builds an independent personal balance sheet alongside the operating company, financial decisions become less reactive, negotiations more deliberate, and timing voluntary rather than forced.
The goal is not to leave the business, but to ensure that remaining in it is always a deliberate choice rather than a necessity.
Sources
Swensen, David F. Pioneering Portfolio Management. Yale University Press; and institutional allocation data referenced by major university endowments.
IRS Publication 560. Retirement Plans for Small Business. https://www.irs.gov/publications/p560
IRS Defined Benefit and Cash Balance Plan Guidance. https://www.irs.gov/retirement-plans/defined-benefit-plan
Cash Balance Plan Contribution Limit for 2026 https://www.emparion.com/cash-balance-plan-lifetime-contribution-limits/
Internal Revenue Service. Trade or Business Expenses Guidance. https://www.irs.gov/forms-pubs/guide-to-business-expense-resources
Internal Revenue Service. Small Insurance Company Taxation (Section 831(b)). https://efaidnbmnnnibpcajpcglclefindmkaj/https://www.irs.gov/pub/irs-drop/rp-25-13.pdf
IRS Notice 2016-66 and Micro-Captive Transaction Guidance. https://efaidnbmnnnibpcajpcglclefindmkaj/https://www.irs.gov/pub/irs-drop/n-16-66.pdf
IRS Publication 537. Installment Sales. https://www.irs.gov/publications/p537
IRS Guidance on Buy-Sell Agreements and Life Insurance Estate Inclusion. https://www.irs.gov/publications/p559
Internal Revenue Service. Capital Gains and Losses. IRS Publication 550. https://www.irs.gov/publications/p550
Important Disclosures
The information contained herein is provided for informational and educational purposes only and should not be construed as investment, tax, or legal advice. Always consult a qualified financial, tax, legal, or insurance professional regarding your individual circumstances.
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