It's time to raise your nose from the grindstone and take an overall view of your business' health. Here's what you need to examine to get a good diagnosis
Entrepreneurs are so intent on making their companies day-to-day successes that most have little time for long-term financial planning. With 2007 drawing to a close, this is a good time to take a step back and perform an important yearend checkup on your company's "vitals." Today's column will present some recommendations for a general business and personal financial evaluation. The next column will raise some items to discuss in a yearend tax planning meeting with your accountant or chief financial officer.
Revisit your company's organizational structure. Just because your firm is a sole proprietorship, limited liability company, or C corp today doesn't mean it should necessarily stay one forever. For instance, the business structure (BusinessWeek SmallBiz, August/September 2007) you chose as a startup may no longer be serving you effectively if you're several years into running your company and have substantial revenues.
"The typical small business owner has a sole proprietorship, general partnership, LLC, or S corp, all of which are pass-through entities," says Marc Belletsky, estate and business planning consultant at the Hartford (HIG). "This means their personal tax bracket is the same as their business tax bracket because their business income is declared on their individual tax return. But some people might want to take advantage of a corporate tax bracket by moving their company to C corp status."
Look into changes in the laws surrounding business structures. For instance, spouses who were in business together were previously required to file as a partnership, says Lorin Luchs, a tax partner in the greater Washington (D.C.) office of BDO Seidman. "Because of the complexities involved, they normally allocated all the family business income to one spouse. Now they are able to report the income on a Schedule C for each spouse," Luchs says.
Talk to your business attorney or accountant about the pros and cons of your current business structure and whether it's still right for you. Don't forget that 2008 will be a political transition year (BusinessWeek.com, 11/14/07), and tax rates may be changing in the near future.
Talk to a financial adviser about your personal investment strategy to make sure it is still on track. Given the increased market volatility in the last half of this year, there may be some changes in your portfolio and adjustments that need to be made accordingly. Personally check out any investments or strategies your adviser recommends. While a high level of trust in an adviser is important, you still need to do the due diligence yourself when your long-term financial health is on the line.
If your company doesn't already have a retirement plan in place, get some advice about offering one. There are pension options tailored specifically to small business owners, including the solo 401(k) and the solo defined benefits plan. Several plans are both simple to set up and reasonably inexpensive to operate. Some even let your company opt out of making employee contributions during lean years.
"Many of these plans will allow those who are highly compensated to have a larger percentage of the contributions made on their own behalf rather than their employees," says Tom Foster, spokesperson for the Hartford's retirement plans group. In order to take a retirement plan deduction for the 2007 tax year, you'll need to set up a qualified retirement plan by Dec. 31. You may not actually have to fund the plan until you file your tax return next year, however. If you miss the deadline, you can set up and fund a Simplified Employee Pension (SEP) plan anytime before you file your tax return. "SEPs are less flexible and the rules surrounding them are stricter, so they may not be as appealing as other plans, but it's worth looking into," Foster says.
If you've got a plan already in place, think about your 2007 contribution if you haven't made it already. Payments to your retirement plan can significantly reduce your 2007 taxable income.
Review any major life or business changes you've faced this year and determine if there are any new qualifications or disqualifications for tax deductions that will result. A marriage, divorce, birth, or even a birthday can bring about major tax and business ramifications. For instance, if you turned 50 this year, you became eligible for the retirement plan baby boomer "catch-up contribution." This means you can make an additional $5,000 contribution to your pension plan.
If this year's birthday put you over the age of 59, you can now take withdrawals from your retirement account without incurring a 10% penalty. And if you're over 70 as of this year, you may be required to start taking mandatory minimum withdrawals from your retirement plan. This depends, however, on the status of your business ownership and whether you are still working, so check with a pro on this point. If you don't follow tax rules properly, you could get slapped with large penalties and, in some cases, interest.
Revisit your insurance policies to see if you need additional coverage or can drop existing coverage that no longer applies to your company's situation. Definitely talk to your broker if your company has hired key executives; purchased new equipment, property, or vehicles; moved its headquarters or opened new regional offices; added new product lines or major customers; expanded regionally or overseas; or if your number of employees or annual sales have grown or declined dramatically, says Mark Lange, the Hartford's vice-president for market management.
Although "insurance is generally not at the top of the list of things small business owners like to spend time on," Lange concedes, an annual reevaluation is a must. Talk to an independent insurance broker about whether you need to purchase, drop, or beef up your business ownership policy, workers' compensation insurance, commercial vehicle insurance, errors and omissions coverage, or employment practices liability coverage. Don't forget to ask about updating your personal insurance coverage if you use the same broker for both policies. That's not a bad idea, Lange adds, because one professional can then ensure that your entire risk portfolio is assessed as a whole. An independent broker can shop around for the best prices and provide access to specialized insurance coverage if your small business needs it.
No matter what stage your business is in, make sure you have a transition strategy in the works. Being prepared for anything and everything is an important part of running a successful business, but the majority of U.S. businesses do not survive the death of their primary owner.
"What is your plan for the eventual transfer of your business from your leadership? Will it go to someone in your family, an employee, or a third party?"" asks Brittney Saks, a partner in the PricewaterhouseCoopers Private Company Services practice. "You don't necessarily have to come up with all the answers," she says, "but yearend is a good time to think about it. Early planning is the key to success on this issue."