Don't neglect long-term planning in tough times
by Jim Kline
If you own a business, it's likely your biggest investment. Unfortunately, it may be facing many of the same economic challenges as investments in the stock market and real estate.
You may simply be trying to survive these challenges. But it’s critical to think about long-term considerations as well. Among them:
Save for retirement. If most of your money is tied up in your business, retirement can be a challenge. So if you haven’t already set up a tax-advantaged retirement plan, consider setting one up this year. Keep in mind that if you have employees, they generally must be allowed to participate in the plan, provided they work enough hours. Here are a few options:
Profit-sharing plan. This is a defined-contribution plan that allows discretionary employer contributions and flexibility in plan design. You can make deductible 2009 contributions as late as the due date of your 2009 income tax return, including extensions, provided your plan existed on Dec. 31, 2009.
SEP. A Simplified Employee Pension (SEP) is a defined-contribution plan that provides benefits similar to those of a profit-sharing plan. But you can establish the SEP in 2010 and still make deductible 2009 contributions as late as the due date of your 2009 income tax return, including extensions. Another benefit is that a SEP is easier to administer than a profit-sharing plan.
Defined-benefit plan. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum annual benefit for 2009 is generally $195,000 or 100 percent of average earned income for the highest three consecutive years, if less. Because it’s actuarially driven, the 2009 contribution needed to attain the projected future annual benefit may exceed the maximum contributions allowed by other plans, depending on your age and the desired benefit. You can make deductible 2009 contributions until Sept. 15, 2010, provided your plan existed on Dec. 31, 2009. Warning: Employer contributions are generally required and must be paid quarterly if there was a shortfall in funding for the prior year.
Plan Your Exit
An exit strategy is a plan for passing on responsibility for running the company, transferring ownership and extracting your money. This requires planning well in advance of the transition. Here are the most common exit options:
Buy-sell agreements. When a business has more than one owner, a buy-sell agreement can be a powerful tool. The agreement controls what happens to the business when a specified event occurs, such as an owner’s retirement, disability or death. Among other benefits, a well-drafted agreement:
• Provides a ready market for the departing owner’s shares,
• Sets a price for the shares, and
• Allows business continuity by preventing disagreements caused by new, unwanted owners.
A key issue with any buy-sell agreement is providing the buyer with a means of funding the purchase. Life or disability insurance often helps fulfill this need and can give rise to several tax and non-tax issues and opportunities. One of the biggest advantages of life insurance as a funding method is that proceeds generally are excluded from the beneficiary’s taxable income. There are exceptions, however, so be sure to consult your tax advisor.
Succession within the family. You can pass your business on to family members or close relatives by giving interests, selling interests or doing some of each. Be sure to consider your income needs, how family members will feel about your choice, and the gift and estate tax consequences. Now may be a particularly good time to transfer ownership interests. If your business has lost value, you can transfer a greater number of shares without giving away more value for gift tax purposes. You also can leverage your annual gift tax exclusion by gifting ownership interests, which may be eligible for valuation discounts.
Non-family succession. If family members aren’t interested in or capable of taking over your business, one option is a management buyout. This may provide for a smooth transition because there may be little learning curve for the new owners. Plus you avoid the time and expense of finding an outside buyer.
Jim Kline is managing director for RSM McGladrey's small business practice in Kansas City.
P | 816.751.1804
E | jim.kline@rsmi.com