When you are caught up in your day-to-day activities it can be difficult to take a step back and look at the bigger picture. This is certainly true for a small business owner because it takes so much time and energy to run your business successfully.
Retirement and estate planning involve some complexities for everyone, but when you are a small business owner you have added issues to consider.
When you work for a company you can simply put in your notice and accept your plaque as you walk out the door. On the other hand, when you are the owner of the business you must consider business succession strategies.
The sooner you determine how you want to exit, the better. Your exit strategy might affect the decisions you make every day. For example, if your intention is to pass the business along to a family member, you may be inclined to invest money into the infrastructure. If you are going to close the business entirely or sell it, you may focus on maximizing current revenue above all else.
Each situation is going to be unique. The best way to explore your options when it comes to small business succession planning would be to arrange for a consultation with an estate planning lawyer who has a background assisting business people.
Building a business may be your life’s work. It is important to make sure that you are comfortable with how you will be exiting.
Planning for Business Partners
With the above in mind, consider a partner in a small business. The value of the business may be the largest asset that this individual has to pass along to his or her family. However, there may well be multiple heirs, so this value must be divided somehow.
The family could sell the share in the business and split the proceeds, but this leaves a number of issues. Do the remaining partners have the cash to buy out the family? Or does the family sell the share of the business to a new investor? If the family tries to sell a fractional share of the business, they will not likely obtain the full value of the fractional share! Not to mention that the surviving partners would not necessarily embrace a new investor.
This type of situation can be addressed through a properly drafted operating agreement. Alternatively, this can be addressed through the execution of a buy-sell agreement called a cross-purchase plan.
In a cross-purchase plan, the value (or the methodology of the value) of the business interests is agreed-upon by the partners. The partners then purchase life insurance coverage on one another with the proceeds equaling the value of the business interests. Under the terms of the agreement, the remaining partners purchase the share that was owned by the deceased partner from his or her family with the combined insurance policy proceeds. In this manner, the family has liquidity while the surviving partners retain control.
A lot of people get their first exposure to retirement planning on the job. Most companies will give you the opportunity to participate in a group 401(k) retirement savings plan, and many of them will actually match your contributions up to a particular percentage. Those who contribute into a 401(k) account as employees fund their retirement with pre-tax earnings. The participant will eventually pay taxes on the withdrawals, but those taxes are deferred for a very long time.
When you work for yourself, you must make different arrangements. It is possible to open your own 401(k) account as a self-employed individual, and those who are serious about being able to retire in comfort should certainly consider doing so. As a self-employed individual with a 401(k) account, you have to make deposits on your own, but they are tax-deferred in the same manner. Most small business owners also look at other retirement planning options, such as SEP IRAs.
With nearly every retirement account, you must leave the account untouched until you are at least 59.5 years of age if you do not want to pay penalties. Once you turn 59.5, you can begin to take distributions in a penalty-free manner, but you don’t have to begin taking distributions until you are 70.5 years of age.
Retirement planning, business succession planning, and estate planning should all be addressed simultaneously to ensure your overall financial goals remain intact for you and your family.
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