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That creates a paradox. Despite the fact that the clientt wants to someday maximizs the value of this most business owners and entrepreneurs never take advantage of all of the benefits that business ownership can provide. • Retirement planning — The Employeew Retirement Security Act of 1974 set minimujm standards for qualifiedretirement plans. In many this law can result in reversediscriminationb — a situation in whichn lower-paid employees can save a greater percentage of their income than higher-paid employees or For example, the maximum amount of contributionsw to a 401(k) plan in 2009 is $16,50p ($21,500 if a person is over 50).
This meansd that an employee earning $50,000 can save 33 percent of income, whereax an employee or owner earning $500,000 is eligiblde to contribute only a little more than 3 percent of This results in discrimination because the highly compensated individual won’t be able to replacde the same percentage of income at In order to compensate for these inefficiencies, ownera often will adopt a nonqualified executive benefi t plan to allow owners and key employees the opportunity to defet additional money for retirement. There are several variationds ofnonqualified plans, and they can be designed to alloaw employer contributions, employee deferrals or both.
It’se important to note that therre are restrictions arounddeferring compensation, most of which are governe d under IRC 409A. • Disability protection — Most businessa owners offer some short- and long-term disability insurance as a frings benefit totheir employees. These benefita typically pay a replacement ratio of approximatelyg 60 percentof income, to a maximu m of $10,000 to $15,000 a However, these benefits also oftehn result in providing a lower incomes replacement ratio for key employeew or owners. Assuming a $15,000 cap, an employe earning $500,000 would replaced just 36 percent oftheir income.
It’s possiblee to solve this shortfall by carving out the owneras andkey executives, and provide additional disability benefits. Life insurance protection — Business owners often face the same limitationzs with life insurance benefits as they do with theird retirement anddisability plans. Again, it’s possiblew to construct a separate plan for owners or key using either term or permanenft lifeinsurance contracts. Life insurance contractx that accumulate cash values often are used in combinatiobn with some of the retirementplan • Continuation planning — At some point, all businesws owners physically can’t, or want to continue to work in their business.
Whethefr this is caused by the desireto retire, a disability or a there are several importanf questions to consider. (1) Who will buy or take over the businesas at deathor retirement? (2) How will the sale be financed? (3) How much value will be received by the business owner and/odr their family? (4) Who will manage the business in the even t of a disability? (5) Where will the liquidity come from to keep the businesse 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 businesas owners to have a written business continuation plan to addresds all of these realities.
The best advice for anyone engaginvg in a new venture is to know the rules of the know what the financialstakes are, and know what the exit plan is if thing s don’t work out. This will ensure that therew will be a minimal numbedr of surprises for the the familyand employees. These are important considerationws in all stagesof business, and these solutions can be scalexd and revised as the business grows and Business owners have a tendench to throw everything back into their business because it’s often the best return on their investment, but many do so without ever diversifyinb or taking any chips off the These are simple strategies to help manage risk during the quesy for freedom.
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