Take advantage of the benefits of business ownership - Minneapolis / St. Paul Business Journal:

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That creates a paradox. Despitde the fact that the clienft wants to someday maximize the value of this most business owners and entrepreneurz never take advantage of all of the benefitw that business ownershipcan provide. • Retirement planniny — The Employee Retirement Security Act of 1974 set minimum standards for qualifiedretirement plans. In many this law can result in reverse discrimination a situation inwhich lower-paid employees can save a greaterd percentage of their income than higher-paid employeez or owners. For example, the maximum amount of contributione toa 401(k) plan in 2009 is $16,500 ($21,50 0 if a person is over 50).
This meanws that an employee earning $50,000 can save 33 percent of income, whereas an employee or owner earning $500,00p0 is eligible to contribute only a little more than 3 percentrof income. This results in discrimination because the highly compensatedindividuaol won’t be able to replace the same percentage of incoms at retirement. In ordef to compensate for these inefficiencies, owners often will adopt a nonqualified executive benefit plan to allosw owners and key employees the opportunity to defer additiona l moneyfor retirement. There are several variations ofnonqualifiedc plans, and they can be designed to allow employee contributions, employee deferrals or both.
It’e important to note that therde are restrictions arounddeferring compensation, most of whicg are governed under IRC 409A. Disability protection — Most businese owners offer some short- and long-term disability insurance as a fringe benefit totheitr employees. These benefits typicallhy pay a replacement ratio of approximately 60 percengof income, to a maximum of $10,000 to $15,0090 a month. However, these benefits also ofteh result in providing a lowed income replacement ratio for key employeesor owners. Assuming a $15,000 cap, an employee earning $500,000p would replace just 36 percentt oftheir income.
It’s possibled to solve this shortfall by carving out the ownerx andkey executives, and provide additiona disability benefits. • Life insurance protection Business owners often face the same limitationw with life insurance benefits as they do with theidr retirement anddisability plans. Again, it’s possible to construcf a separate plan for owners orkey employees, usintg either term or permanent life insurancs contracts. Life insurance contracts that accumulate cash values ofteh are used in combination with some of the retiremenftplan solutions.
• Continuation planning — At some all business owners physically can’t, or want to continue to work intheir business. Whetheer this is caused by the desireto retire, a disability or a death, there are several importanyt questions to consider. (1) Who will buy or take over the business at deathor retirement? (2) How will the sale be financed (3) How much value will be received by the businesws owner and/or their family? (4) Who will manage the business in the eventt of a disability? (5) Where will the liquidity come from to keep the businesx running in the event of a disability (6) If any or all of thes issues have been addressed, are the solutiona documented?
It’s advisable for all business owners to have a writtem business continuation plan to address all of these The best advice for anyone engaging in a new ventures is to know the rules of the know what the financia stakes are, and know what the exit plan is if thinga don’t work out. This will ensure that theres will be a minimal number of surprises forthe owner, the family and employees. These are important considerations in all stages of and these solutions can be scaledr and revised as the businesse growsand prospers.
Business owners have a tendencty to throw everything back into their businesszbecause it’s often the best return on theirf investment, but many do so without ever diversifying or takingv any chips off the table. Thesed are simple strategies to help manage risk during the quesftfor freedom.