After an owner makes heads or tails at the end of the year, they will usually determine whether or not money is left behind for setting up some sort of long term retirement plan within their business. Since there are so many people setting up individual LLC’s or home based side businesses, you need to keep a close eye out this time of year for setting up one kind of retirement plan, a SIMPLE IRA. The deadlines are just around the corner in the next few weeks, so could this be the right type of retirement plan for you?
A SIMPLE IRA (Savings Incentive Match Plan For Employees) was first available to small business owners in 2001. A SIMPLE IRA plan is an IRA-based plan that gives small employers a simplified method to make contributions toward their employees’ retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or nonelective contributions. All contributions are made directly to an Individual Retirement Account or Individual Retirement Annuity (IRA) set up for each employee (a SIMPLE IRA). SIMPLE IRA plans are maintained on a calendar-year basis. See IRS Publication 560, IRS Publication 590 and IRS Notice 98-4 for detailed information on SIMPLE IRA plans. (www.irs.gov)
SIMPLE IRA’s are designed for businesses with under 100 people (mostly I have used these with businesses under 10 people) and people who have earned at least $5,000 in compensation for the calendar year. A SIMPLE IRA plan can be set up effective on any date between January 1 and October 1, provided the plan sponsor did not previously maintain a SIMPLE IRA plan. With October 1st looming right around the corner, you must get the program set up or the tax year will pass you by to do this type of retirement plan. Even older workers who are over the age of 70 ½ can still make contributions into a SIMPLE IRA plan. This is what makes this plan so spectacular is that it can be used for both younger and older workers.
An employee may defer up to $12,500 for 2015 (subject to cost-of-living adjustments for later years). Employees age 50 or over can make a catch-up contribution of up to $3,000 for 2015 for a maximum of a $15,500 contribution. (subject to cost-of-living adjustments for later years). The salary reduction contributions under a SIMPLE IRA plan are “elective deferrals” that count toward the overall annual limit on elective deferrals an employee may make to this and other plans permitting elective deferrals. (source: www.irs.gov) This means that you could have a small business which nets $8,000 in profit and still make an $8,000 retirement contribution provided your family has the cash flow. In addition to the ‘employee’ contribution, the employer can make a ‘match’ up to 3% dollar for dollar or the employer can make a non-elective contribution of 2% of the employee’s compensation. The majority of these I have set up over the year typically will have a matching program to force some behavior on behalf of the employee to save. If you have a small business, you can also consider hiring your spouse into the business to gain some additional retirement contribution flexibility.
SIMPLE IRA’s fall underneath the same tax rules that you see on regular IRA’s. You typically will be penalized for an early distribution before the age of 59 ½, so you should consider any money you put in the plan as a long-term investment. For employer’s, you cannot set up a vesting schedule on this type of retirement plan as all employer contributions will be immediately vested the day that you make the matching contribution. The SIMPLE IRA plan doesn’t carry any administrative cost beyond the custodial IRA cost if there is one at all.
Most people do their tax planning sometime in December or they wait until the time they actually file their taxes. Even though it is football season, it is an important time of the year if you started a new business venture, created a home business, or earned some type of 1099 income because there could be an opportunity to make life ‘SIMPLE’ and get some more dollars set aside for your retirement. That is a smart money move no small business owner can pass up and if you need help go to www.oxygenfinancial.net and we will help you set one up no matter where you live in the country!
Written by: Ted Jenkin
Most people daydream about the idea of running their own business. The freedom to have no boss, set your work hours, and control your own financial destiny. However, running your own business doesn’t come without taking on some bumps and bruises. Here are ten important lessons that every entrepreneur should keep in the back pocket.
- Entrepreneurs Are Always Overly Optimistic- I often use this phrase with the works; irrational exuberance. Be very careful of letting your own rose colored lenses cloud the quality decision making your company needs based upon the facts.
- Measure Twice And Then Measure Again- No matter how many pro forma sheets you run and how many classes you sit through, nothing can prepare you for the certainty of uncertainty. Make sure to margin for error in the beginning.
- If It Doesn’t Smell Right, Don’t Do It- You’ll have lots of salespeople wanting to sell you different solutions or products for your business. If they don’t pass your smell test, than just move on to the next salesperson. You won’t be missing out on anything.
- Be An Avid Tester- Nothing can get you quicker to answers than doing A-B testing and figuring out the answers to your hypothesis. Fail fast and correct quickly.
- Activity=Effectiveness- You will typically get better at what you do more often. Focus on the tasks you are good at and those that generate top line revenue. Get good at these and do it more often.
- Be Prepared To Cut Bait- This doesn’t mean giving up as an entrepreneur, but because of industry or regulatory changes you should be prepared to cut bait on what doesn’t work and focus on what will work to grow your company.
By learning some of these lessons, hopefully you can take less of an initial beating as an entrepreneur. There is no doubt you’ll be left with a few scars as all entrepreneurs are when they start a business.
Written by: Ted Jenkin
When business owners set up an S Corporation and creates a business entity, it is usually an accountant or bookkeeper (or both) that crank out the profit and loss statements for an S Corporation owner. What can be confusing at the end of the year, because an S Corporation owner has multiple methods to receive cash through the business, is to actually figure out what you made in the business. Taxes in many cases can be even more confusing to the S Corporation business owner. Here’s a ‘your smart money moves’ breakdown to figure out just how much you made in your business.
- Salary- When you own an S Corporation, the IRS has salary guidelines on how much you should be paying yourself. The IRS has created an outline of what’s called “reasonable compensation” that should be paid to the owner. There are a myriad number of factors including industry averages, number of hours worked, and what is being paid to other employees in the company. S Corporation owners don’t generally like to pay themselves salary because their profits escape half of the social security tax, etc., but one form of ‘how much did I make’ is the salary you pay yourself.
- Net Profit- After you tally up all of your revenue and you subtract out all of your expenses, your profit and loss statement will either be in the black or the red. What’s really relevant is that if the business is profitable, your business checking account should go up every month. The real tricky part of figuring how much you actually made is that once the money is in your business checking account you have some choices. You can choose to reinvest the money in the business. You can choose to let it sit in the bank account. You can choose to move money from your business account to your personal checking account. This is what is known as a distribution. As with all corporations, the profit and loss may not tell the whole story. What you earned in your mind will technically be the money you moved from the company to you minus the federal and state taxes you’ll have to pay on that money.
- Add Backs- Many business owners will have items that the business pays for them in the course of doing business. This can range from a cell phone to meals and entertainment. Although this isn’t a form of cash compensation, an S Corporation owner should try to note what kind of expenses the business is picking up as otherwise they would have to pay for them out of pocket with after tax money. These expenses should be considered in the analysis of what you made as the owner.
- Loans- Some owners don’t pay themselves a distribution, but they take loans from the company. This is a way to extract compensation from the company and keep the net profits down in the business.
For any owner, it can be a challenging exercise to figure out what you actually made. This is definitely true for an S Corporation owner. If you use this outline, you’ll have a better idea of what you actually made in your business.
Written by: Ted Jenkin
You have spent 15, 20, or even 30 years building up a business that you plan to pass on to your family. Now, most of your time is spent laying out your future travel schedule, perfecting your golf game, or thinking about lazy Sunday afternoons hanging out having fun. You are finding it hard to get away from the business because it still requires your attention, and now you are wondering whether or not your son or daughter are even interested in taking over this family business that runs like a machine. How will you be able to pass on your family business that you have worked so hard for your entire life?
Unfortunately, most business owners are so frantic running their business to create top line revenue that they don’t spend the time to lay out their own succession plan. If you pass the business on to only one child, will there be some sort of sibling rivalry? If you die, what will happen to the business today? If your children don’t take it over, have you identified a quality successor who can run and maintain the business? Here are a few thoughts and options to consider when passing on your family business.
- Sell The Business Outright To A Third Party
If you haven’t done any sort of formal business valuation, it is worth it to get an idea about what your business is actually worth at this time. Just as is the case with real estate, many business owners become sentimentally attached to their businesses. Thus, they often feel it is worth more than it actually may be in the marketplace. Depending on your business, you may be required to stay on with the new company anywhere from six months to several years depending on the type of business and the overall transition. You may be the kind of business owners that just wants the cash to walk away, or you may look for a third party that carries the same values you have built in your organization.
- Grooming A Family Member Or Internal Successor
Finding a successor in your business won’t be as easy as you may initially think. After running your business as long as you have, your employees and customers have become accustomed to a certain way of doing business. They have become used to your style of running the business. It will typically take three to five years to really groom in a new operator for your business. Remember, you have built it from the ground up so you naturally know all the skeletons and the ‘why’ certain parts of your business run the way that they do. If you do select a family member, treat them as you would any independent successor you would have brought into the business.
- Let The Business Run Out Of Air
One analysis you will have to do when you sell your business is to determine whether or not the cash (net of taxes) from the sale of the business will be able to replace the income (and fringe benefits) you currently earn from the business. If you have built a lifestyle business and there isn’t significant intrinsic value in the business, you might just work the business down until it doesn’t run anymore. This means you wouldn’t be putting in the 60 hour work weeks, and just let the business continue to bring in income until it slowly erodes away. This isn’t the easiest to handle from an emotional perspective, but might make the most sense financially.
There are a slew of other options to look into including employee stock ownership plans, but if you plan to pass the family business on down the road it is important to get all of your options out on the table to ensure you make the right decision for you and your family.
Written by: Ted Jenkin
One of the questions I will ask a business owner in my interview process is “Do you have a business will?” By this line of questioning, I am simply asking what happens to the business if you die. Some businesses have one or multiple partners and others businesses are owned by a single individual. Far too often, most owners after they have built a successful business don’t take the time to flesh through the details of what will happen with the business in the event of death, disability, retirement, etc.
One of the most important discussions for any owner is how to install a buy-sell agreement. The buy-sell agreement is typically between partners or co-owners, although it could work with an outside third party if there aren’t other owners in the business. Think about this almost as a premarital agreement between two parties about the value of the business and what will get paid out to the other owners family at the time of death, incapacitation, etc. so the business transfers over to the other owner. Most co-owners may not want to work with another’s spouse, family, and the predetermined buy-sell agreement can make a smoother transition in the business.
Part of any good business plan is an exit strategy if the unexpected happens. A good Buy-Sell Agreement should anticipate certain unfortunate but foreseeable events, and make sure a fair and reasonable plan is in place. When a triggering event occurs, everyone should be fully comfortable and prepared to move forward with the plan.
The most critical detail of the Buy-Sell Agreement to the company’s survival is how to pay the purchase price for a departing owner’s interest. If the company or other owners do not have adequate assets, cash reserves, or credit available to fund the payment obligations, then they cannot fulfill their side of the agreement. This isn’t good for anyone – the departing owner (or his estate and family), the company itself, or the remaining owners.
- Insurance. Since death and disability are two of the most basic triggering events in any Buy-Sell Agreement, life and disability insurance can be the most attractive methods for funding the payment obligation after those triggering events.
- Term or permanent life insurance or a mix of both may make sense depending on the circumstances. The structure of the Buy-Sell Agreement as a redemption, cross-purchase, or hybrid will determine who should own the insurance policies. Careful attention should be given to the ages and insurability of the owners to determine a structure that is fair, cost effective, and will cover the appropriate time horizon the business owners’ need. As the business grows and its fair market value increases, owners should ensure that additional life insurance can be acquired over time to keep pace with the increasing value of the business. Guaranteed insurability options on term or permanent insurance can allow the policyholder to acquire additional life insurance at certain intervals.
- If an owner is not insurable at the time that the Buy-Sell Agreement is entered, it may be possible to use an existing policy of the uninsurable owner, if one exists. If an existing policy is transferred to the company or other shareholders, there are certain rules and strategies to follow to help prevent adverse tax consequences to the insurance proceeds after the insured’s death. Make sure you have good tax and insurance advisors helping you with these details.
- Funding without insurance. Some owners choose not to use life or disability insurance in funding death or disability triggering events in Buy-Sell Agreements. Typically these owners believe that, in the long-run, the returns on capital reinvested into the company will far exceed the potential returns from any investment in insurance, and they are willing to roll the dice that they will live long enough for this to be the case. Also, keep in mind that there are other triggering events for which insurance is not relevant (e.g. retirement, bankruptcy, divorce).
- If insurance is not used or not applicable, some businesses and owners will strategically set-aside and invest funds to cover any anticipated buy-sell payment obligations. Even if funds have been set aside, it is always important to structure buyout payment terms giving the business or owners a sufficient time to pay for a departing owner’s interest. Talk with your bank and lenders to discuss payment obligations under buy-sell planning and the possible need for credit facilities in case debt funding is required.
- Combination funding. Some owners choose a combination of life insurance and other funding methods for the Buy-Sell Agreement. Life insurance can guard against premature deaths, with the remainder funded by accumulated earnings and corporate profits. For example, shareholders in a corporation could create a buy-sell arrangement to purchase 65% of the stock through a cross-purchase agreement (with immediate funding by life insurance), and 35% of the stock would be redeemed by the corporation over time after the death of a shareholder. Alternatively, shareholders may opt to initially fund 100% of the buy-sell agreement with a cross-purchase design funded by insurance. The funding of the agreement can then change annually, with the corporation assuming responsibility for purchasing any incremental increases in shareholder value as the corporation grows. This eliminates the need to increase the amount of life insurance over time. It also provides assurance to the shareholder’s family that it will receive a minimum amount whether or not the corporation can generate the funds needed for the buy-sell arrangement.
A Buy-Sell Agreement is a critical component of any business plan. If protecting the value and future of your business is important to you, your family, your partners, and employees, then don’t get caught off guard without a plan!
This material is not intended to replace the advice of a qualified attorney or a tax advisor. Before making any financial commitment regarding the issues discussed here, consult with the appropriate professional advisor.
Written by: Ted Jenkin