business finances
As many business owners painfully discover, successfully building their enterprise does not always directly translate into successfully building their personal wealth. Especially given day-to-day business demands, it is easy to lose sight of the ultimate business’s purpose, which is enhancing the owner’s personal wealth.
Converting a business into a wealth enhancement vehicle requires ongoing concerted, systematic effort. At some point the owner must also worry about the business if something should happen to him/her.
These are the critical challenges I have most often encountered after having worked extensively with business owners for the past 30 years. These can represent opportunities if properly addressed on a timely basis; in not, they may become detriments.
Protecting Your Business and Personal Assests Against Liability
Especially in this litigious age, protecting business and personal assets against a liability claim is critical to financial success. Again, a starting point lies in the limited liability protection found in the appropriate business entity. While this may not protect the business itself, it may protect the owner’s personal assets. Beyond that, it is important to:
Review capitalization levels to make sure that excess cash or unrelated assets are not being left in the firm unnecessarily.
Make sure employees are not given the appearance of greater authority than the owner intends they have. Their job titles should be consistent with their function, with appropriate checks and balances that a “prudent business person” would take to assure employees are acting within the scope of their authority.
Consider general and professional liability insurance that could protect against allegations of negligent activities or failure to use reasonable care.
Periodically review the basic corporate documents (articles of incorporation, bylaws, meeting minutes, etc.) to assure they are in good order and properly maintained.
Best Qualified Retirement Plan for Your Situation
401K, Profit Sharing, Defined Benefit Pension, SIMPLE or Simplified Employer Pension. Several factors need to be considered, including:
Variability of business revenues and income: Generally, greater tax benefits are available at the cost of higher committed plan contribution levels. The downside, of course, is that in lean years it could be difficult to maintain those higher contributions. It is important to carefully weigh these, and often advisable to err on the side of greater flexibility and lower contribution levels. This is especially so given recent enhancements to the traditional 401K plan.
Owner or Employee Emphasis: ERISA is the major body of regulations that specifies minimum participation requirements for rank and file employees. Typically all must participate equally for any contributions made for owners and key employees up to specific levels. Within these rules is some flexibility that can allow owners to receive a relatively greater proportion of dollars contributed. This is especially so if the firm is willing to make prescribed minimum contributions under “Safe Harbor” provisions, and/or if the key employees have a significantly higher average age under “Age Weighted” arrangements.
Retention: Ensuring that the dedicated staff built through the years is sufficiently compensated so to not be tempted to look elsewhere for employment is important. It may also be a priority to provide them with an incentive to begin saving for their futures. This is especially so since many workers are not saving enough to be able to live comfortably after retirement and the owner worries about their well-being.
Every business weighs the relative importance of these issues differently, notes Entrepreneur. Generally, each plan has trade offs between amount of annual tax-deductible contribution allowed, flexibility of varying that contribution in good and lean years, and a desire to reward employees versus encourage them to save for themselves. When properly done, the right retirement plan can provide the owner with effective tax benefits now, a stream of reliable income well into retirement, and a motivational-retention tool for important employees.
Every owner will one day leave the business. The question is, will it be on his/her own terms or dictated based on health or financial circumstances? When it is properly planned, it can be a positive, life changing, wealth creation event that brings financial independence to the owner and/or family, and has the added benefit of leaving the business a healthy, viable entity that can flourish long after the owner departs.
A qualified financial advisor can help develop a clear picture of the business’s value and then integrate that information with the owner’s personal financial situation to give a comprehensive view needed to plan for a successful future.
Strategies to Help Keep Your Taxes Low
With the goal of helping the owner and business keep more of what is earned, there are a wide range of tax planning opportunities that come with business ownership:
Tax deductible payments to owners: According to Forbes, often it can be advantageous for an owner to purchase an asset personally, then rent or lease it to the business. This can involve equipment or real estate, and can not only allow the entity to deduct the payment from its tax return, but also allow the recipient owner to shelter a portion of taxation from that payment with depreciation, interest and other expenses, thereby enhancing the owner’s benefit.
Tax advantaged benefits: In addition, there are a wide range of options that may provide benefits to the owner as well as selected employees on a tax advantaged basis. These can include health & welfare trusts, individual pension plans, retirement compensation arrangements, holding companies, charitable donations and estate freezes. How beneficial these may be requires careful consideration of the individual situation.
Business entity: Effective tax management starts with the firm’s chosen business structure. In certain instances, for example, a Sub Chapter S Corporation could allow operating losses to pass to the owners, thereby providing personal tax benefits. In other situations, a regular “C” corporation may protect owners from pass through income that could otherwise have an adverse effect on their personal taxes. An LLC may offer advantages of each. It is important to periodically review the structure in light of current and anticipated business performance over the foreseeable future.
Effective tax management requires continual effort; strategies need to adjust as the owner’s goals and financial situation changes.
