by Intuitive Digital | Aug 20, 2013 | Advice
The final post in our Business Killers assessment focuses on the sixth mistake that business owners make when running their company: failing to anticipate and plan for changing federal and state tax laws.
Answer the following questions to see if your company is vulnerable.
• Has the owner determined his or her financial goals?
• Is the owner proactively planning to deal with changing tax laws?
• Is the owner working with financial experts?
• Will any of the owner’s retirement income be tax-free?
• Does the owner have a written exit plan for the business?
The more “no” answers, the greater the risk. How does your company look?
Many owners assume that you can’t beat Uncle Sam. Thus, they fail to appreciate that tax planning is an important part of an exit strategy. And like most aspects of that exit strategy, the more time you have to plan, the more likely you are to achieve the results you want. The amount of tax owed from the sale of a business depends upon whether the sale proceeds are taxed as ordinary income or capital gains. Profits from the sale of business assets likely will be taxed at capital gains rates, but money paid to an owner for transition consulting services probably will be taxed as ordinary income.
It’s not too early to begin working with your team to estimate the likely tax bite from a sale of the company and come up with a plan to pay those taxes. This will allow you to leave the business on your timetable, with your retirement funding intact.
by Intuitive Digital | Aug 15, 2013 | Advice
Today’s post focuses on a fifth critical mistake that business owners make when running their company: failing to adequately fund a retirement.
Answer the following questions to see if your company is vulnerable:
• Does the owner have investments other than his or her business?
• Will the business assets account for less than 25% of the owner’s retirement planning?
• Has the owner created income from more than four sources other than the business?
• Do any of the owner’s retirement assets have guaranteed returns?
• Has the owner had his or her retirement income projected or analyzed to identify shortfalls?
• In the past year has the owner spent more than one hour planning for retirement?
The more “no” answers, the greater the risk. How does your company look?
Changing technology and an increasingly global economy mean that competition in any business is never far away. While a business can be an important source of wealth to fund retirement, it shouldn’t be the only egg in your basket. Owners need to have a successful business and an adequately funded retirement. Unless you’re independently wealthy already, that probably means you shouldn’t reinvest every dime back into the business.
For example, every business owner should have a tax deferred retirement plan which lets them set aside some of the business income and grow it tax-free. And these are not limited to traditional qualified retirement plans. Solopreneurs can use a SIMPLE (Savings Incentive Match Plan for Employees of Small Employers IRA, a SEP (Simplified Employee Pension), or a Solo 401(k) plan.
If, like many owners, you do everything you can to reduce taxable income, then you are also minimizing the amount of Social Security wages that you’ll receive when you retire. Talk to your tax advisor and financial planner to see if you are being pennywise but dollar foolish.
by Intuitive Digital | Aug 8, 2013 | Advice
The blog continues today with our ongoing discussion of the six common mistakes that can destroy businesses. The third mistake is failing to have a succession plan that spells out who takes over the company if the owner becomes temporarily or permanently unable to run the business.
Answer the following questions to see if your company is vulnerable:
• Is there a formal succession plan on file?
• Does the succession plan address disability?
• Has the owner involved key employees and family members in succession planning?
• Has the owner identified in writing who he or she wants to take over the company?
• Do the owner’s family members and employees know who is going to run the company?
• Does the owner have disability buy-sell or overhead expense insurance?
• Does the owner have contribution protection for his or her retirement account if disabled?
The more “no” answers, the greater the risk. How does your company look?
The impact of losing an owner or high performing employee on a temporary – or permanent – basis cannot be overstated. Two steps that will help avoid these problems are disability insurance to provide needed funds to avoid drawing down cash reserves and a written succession plan that provides an interim or new management.
Disability insurance can help replace after-tax income and may also provide benefits to pay ongoing overhead costs of the business. Some policies also have a lump-sum payout option similar to a death benefit on a life insurance policy which might be used to buy out an owner’s interest if the disability is permanent and he or she can’t return to the company. Emergency or short term contingency planning – which usually requires cross-training or cash reserves to hire replacement employees – is also essential to make sure that the company can survive a temporary loss.
by Intuitive Digital | Aug 6, 2013 | Advice
In today’s post we’ll continue our review of the six common mistakes that can destroy businesses. The second mistake is failing to do estate planning, and specifically the failure to accurately estimate (and pay for) any tax liabilities that result from a business owner transferring ownership via a will or trust.
Answer the following questions to see if your company is vulnerable:
• Does the owner have a will or trust and is it up to date?
• Does the owner have a living will AKA “pull the plug” instructions?
• Does the owner have a plan to retain key employees if something happens to him or her?
• Has the owner reviewed his or her estate planning documents in the past three years?
• Has the owner identified and written down his or her trusted advisors?
The more “no” answers, the greater the risk. How does your company look?
Estate planning is important for stating who receives your property and other assets when you die. But it’s also about minimizing potential taxes. As we discussed last month, spouses typically get their portion of an estate tax-free, but children, friends, or business partners do not. The so-called “death tax” comes in two forms: federal (estates valued at more than $5,250,000) and state (Oregon’s inheritance tax applies to estates valued at more than $1,000,000).
Although it may not be possible to avoid an estate tax, life insurance or other investment vehicles may provide a source of funding to avoid a potentially crippling blow.
Running a successful business is time-consuming, but failure to plan is planning to fail. Business owners should take steps to preserve the value of the company for the next generation.
