The Top Five Challenges Facing Business Owners

What strategies can I use to help keep my taxes as low as the law allows?

With the goal of helping you and your business keep more of what is earned, there are a wide range of tax planning opportunities that come with business ownership:

Business Entity

Effective tax management starts with your company’s chosen business structure. In certain instances, for example, a Subchapter S Corporation could allow operating losses to pass to you, the owner, thereby providing personal tax benefits. In other situations, a regular “C” corporation may protect you from passing through income that could otherwise have an adverse effect on your personal taxes. A limited liability company (LLC) may offer some advantages to each. It is important to periodically review your structure in light of current and anticipated business performance over the foreseeable future.

Tax-Advantaged Benefits

In addition, there are a wide range of options that may provide benefits to you as well as selected employees on a tax-advantaged basis. These can include health and welfare trusts, individual pension plans, retirement compensation arrangements, holding companies, charitable donations and estate freezes.

Tax Deductible Payments to Owners

Often it can be advantageous for you to purchase an asset personally, then rent or lease it to your business. This can involve equipment or real estate and can not only allow your business to deduct the payment from its tax return but also allow you to shelter a portion of taxation from that payment with depreciation, interest and other expenses, thereby enhancing your benefit.

Effectively managing your tax situation requires an ongoing effort. Your strategies need to adjust as your goals and financial situation changes.

How can I protect my business and personal assets against liability?

Especially in this litigious age, protecting business and personal assets against a liability claim is critical to financial success. As a starting point, the appropriate business structure lays the foundation for limited liability protection. While this may not protect your business itself, it could help protect your personal assets. Beyond that, it is important to:

• Periodically review the basic corporate documents (articles of incorporation, bylaws, meeting minutes, state filings, etc.) to assure they are in good order and properly maintained.
• Make sure employees are not given the appearance of greater authority than you intend 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.
• Review capitalization levels to make sure that excess cash or unrelated assets are not being left in the firm unnecessarily.
• Consider general and professional liability insurance that could protect against allegations of negligent activities or failure to use reasonable care.

How can I protect my business against the death, disability or departure of one or more key people, and how can I do that before events take my choices away?

Because small businesses are so dependent on one or a few key employees, their inability to perform can result in tremendous lost revenue. Several planning tools are available, such as:

• Key Person Life and Disability Insurance: Provides the business with cash compensation to help replace such a costly loss.
• Buy-Sell Agreements: Can provide contracts to compensate families and provide for smooth ownership transition in the event of death.
• Split-Dollar Life Insurance: Adds tax-advantaged savings features to the aforementioned benefits the business might receive should one of its key personnel die unexpectedly.

Owners typically want to make sure their family is duly compensated for the business they’ve built and that the right people are at the helm in their absence. All told, it is important to have a comprehensive protection plan that can provide continuity and protect your business value should you or a key person be lost or become disabled.

How can I convert my business into planned retirement income?

For many business owners, this becomes the ultimate question. With all businesses, especially those that are primarily service-oriented, it is important to transition from one that is “Lifestyle Based” to one that can be “Equity-Based.” Lifestyle, as the name implies, is designed to support your living standard according to your schedule, income and tax benefit needs. As such, the value is based on you and typically diminishes or vanishes when you retire or pass away.

By contrast, an Equity-Based organization is designed to run with the intention of providing a value that can be accessed by you or your family at some future time. Keys to developing an Equity-Based entity include:

Staff

You must surround yourself with people capable of replicating the product or service your business provides, thereby removing you from the day-to-day business operations.

Procedures

Key to the business’s equity value is its ability to deliver a consistently high-quality product or service independent of your involvement.

Retention

It is essential to have one to three key employees who can act as you would, take pride in the business’s success, and have effective incentives to thrive personally along with that success.

Succession can involve ownership transference to family members, co-owners, current employees or an outside third party. The keys are that your business is capable of operating separately from you and that the transfer is done in the most tax-advantaged manner possible.

Which Qualified Retirement Plan is best for my situation?

Several factors need to be considered, including:

• Consistency of Business Revenues and Income
• Owner or Employee Emphasis
• Retention

Every business owner weighs the relative importance of these issues differently. Generally, each plan has trade-offs between the amount of annual tax-deductible contributions allowed, the flexibility of varying that contribution in good and lean years, and a desire to reward employees versus encouraging them to save for themselves. When done properly, the right retirement plan can provide you with effective tax benefits now, a stream of reliable income during your retirement, and a motivational-retention tool for important employees.

Every owner will one day leave their business. The question is, will it be on your 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 you and/or your family, and has the added benefit of leaving your business as a healthy, viable entity that can flourish long after you leave.