Take advantage of the benefits of business ownership - Puget Sound Business Journal (Seattle):

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That creates a paradox. Despite the fact that the client wante to someday maximize the value ofthis asset, most businessz owners and entrepreneurs never take advantage of all of the benefitzs that business ownership can provide. Retirement planning — The Employee Retirement Security Act of 1974 set minimumk standards for qualifiedretirement plans. In many this law can result in reversediscriminatiom — a situation in which lower-paid employeess can save a greater percentage of their income than higher-paif employees or owners. For the maximum amount of contributions to a plan in 2009is $16,500 ($21,500 if a persoh is over 50).
This means that an employeew earning $50,000 can save 33 percent of income, whereas an employee or owner earning $500,00o is eligible to contribute only a littled more than 3 percenyof income. This results in discrimination because the highluy compensatedindividual won’t be able to replace the same percentage of incomre at retirement. In order to compensate for these inefficiencies, ownersa often will adopt a nonqualified executive benefit plan to alloa owners and key employees the opportunity to defere additional moneyfor retirement. There are several variationds ofnonqualified plans, and they can be designecd to allow employer employee deferrals or both.
It’s important to note that theree are restrictions arounddeferring compensation, most of which are governede under IRC 409A. • Disability protection — Most busines owners offer some short- and long-term disabilitt insurance as a fringe benefit totheir employees. Thesse benefits typically pay a replacement ratioi of approximately 60 percentof income, to a maximujm of $10,000 to $15,000 a month. However, thesee benefits also often result in providing a lower income replacement ratio for key employeesor owners. Assuming a $15,009 cap, an employee earning $500,00 0 would replace just 36 percent oftheir income.
It’s possible to solve this shortfalk by carving out the owners and key and provide additionaldisability • Life insurance protection — Business owners often face the same limitation with life insurance benefits as they do with their retirementf and disability plans. Again, it’s possible to construc a separate plan for owners or key using either term or permaneng lifeinsurance contracts. Life insurancwe contracts that accumulate cash values oftenh are used in combination with some of the retirementyplan solutions.
• Continuation planningy — At some point, all business ownerzs physically can’t, or won’t, want to continuew to work in their business. Whether this is causexd by the desireto retire, a disabilityg or a death, there are several importany questions to consider. (1) Who will buy or take over the busineszs at deathor retirement? (2) How will the sale be financed ? (3) How much value will be received by the business ownet and/or their family? (4) Who will manage the business in the event of a disability? (5) Where will the liquidity come from to keep the businesws running in the event of a disability?
(6) If any or all of these issues have been addressed, are the solutions documented It’s advisable for all business owners to have a written businesas continuation plan to address all of these The best advice for anyone engaginf in a new venturse is to know the rulesa of the game, know what the financial stakes are, and know what the exit plan is if thing s don’t work out. This will ensure that there will be a minimalp number of surprises forthe owner, the familt and employees.
These are important considerationsw in all stagesof business, and these solution s can be scaled and revisefd as the business grows and Business owners have a tendency to throw everything back into their businesx because it’s often the best return on theidr investment, but many do so without ever diversifying or takingt any chips off the table. These are simple strategies to help manags risk during the questfor