A Peaceful Way to End the Year – Checking the List
As the year winds down and we embark upon the “holidaze,” it’s a great time to take a few minutes and step back to review. \”Now?!,\” you may ask. Yes, \”now.\” Reviewing what we’ve accomplished and can accomplish before year’s end allows us to breathe a little easier as we deal with the frenzied seasonal festivities. So, the next few articles will focus on fundamentals that can bring you peace of mind and a nice deep breath before 2014. First on the list is insurance – life insurance and business insurance. If you don’t have it or enough insurance, then either purchase it by year’s end or put in the budget for Q1 ’14. However, you should be mindful that, like all important things we must buy, insurance rates are only going to increase. Thus, it may sound counterintuitive, but if your budget is a significant concern but cash flow isn’t, act now because rates will likely increase and the value of your money will decrease. Life insurance on all the working adults in one’s family is critical. Having sufficient insurance will make for a peaceful night’s rest during times when everything is fun and festive. Conversely, when unthinkable situations occur, family members can focus on the healing and comforting of each other instead of scrambling to try to find money to pay for memorial service necessities or thinking about a job search to replace income. Business insurance should be a no-brainer. Yet, thousands of smart business owners don\’t have liability insurance. America is the most law-suit crazy country in the world. I need not say more about that. However, insurance can also be of great help if a smallbiz owner becomes ill and can\’t pay the bills for a few months. Finally, keyman insurance is helpful in succession planning issues. For more information about the usefulness of insurance, check out these articles and be sure to enter 2014 on a peaceful note: Why and how to make the appropriate designations; it is not as easy as it appears. Determining the appropriate amount; and it shouldn\’t concern Jimmy Choo. Why small business success is like sushi. Happy Holidaze!
2 Very Important Ps in a Smallbiz Estate Plan
Knowing why and when to start succession planning (read here) allows us to move on and address the personal and professional practical considerations of succession planning. The first personal consideration can be assessed by thinking about the following questions: What do YOU want from your succession plan? Do you want your business to continue after you retire, to stop when you have sufficient income to retire, both – which would be similar to semi-retirement, or something else? The 4 basic personal goals surrounding succession planning are: (1) creating a legacy; (2) obtaining sufficient income to retire completely; (3) both – creating a legacy and semi-retirement; or (4) something else, perhaps creating a new career entirely. Once you’ve answered these questions, next you should consider another personal matter and how it aligns with the answer above. This helps define realistic objectives. This personal consideration involves your dependents: Who depends on you now? Who is likely to depend on you in the future? And what might that dependency look like? Being an emotional and psychological support weighs heavier than we often know. So, if this type of support isn’t managed well, it will drain our energy, time, and motivation. How we sustain this loving nature without harming ourselves will be discussed in another week or so, but let’s move on to look at other dependencies. Sometimes supporting someone financially is easier than providing emotional support; sometimes it is not. Perhaps you have or someone you know has family members who phone when the electric bill is too high, when the basement has flooded, or when the church needs a new roof? Perhaps you have a relative whose spouse or partner passed away leaving a minor child to be taken care of by a single parent? Often connected to emotional and financial dependency is physical dependency, typically accompanying caring for a disabled loved one. Your succession plan must account for of these factors and possibilities or your objectives may fall short and you or loved ones may suffer. Once completing this difficult work, we can address the less difficult matters – professional considerations. Last week’s digression, covers the first professional consideration, which is deciding your business’s legal entity, i.e., a LLC or S-Corp. In very limited situations, would one actually consider a sole proprietorship, partnership, or C-Corporation, so those entity choices weren’t discussed. Having decided on a legal entity, the next professional consideration is your market. Who is your market and how can you differentiate your business from your competitors? First just think about the people who may want or need your services or product, e.g., women with bird cages that need regular cleaning. But what if you’re already in business? One idea, for those who provide personal services, is to take the average age of your oldest and youngest client; next consider the source of your highest quality referrals who fit within that average; and then of those clients, what work did you find most enjoyable: talking to the birds, letting them fly around the house, or making their cages shiny? After creating this “niche,” the issue of differentiation remains, which requires performing a lot of research – the competition, customer demand, external variables, and more. After compiling your research, you should be able to determine how you can differentiate your business from your competitors. And yes, we’re still talking about succession planning because to create a winning succession plan, you have to create a winning business. And why is succession planning important to estate planning? If you\’re a smallbiz owner, what are you going to do with the business you once owned? A good estate plan will help answer that question. The Smallbiz Success Series: Decision 3 | Succeed Today | Personal & Practical Points | Relax & Retire
#3 of 3,987: LLC or S-Corp?
So you’ve decided to start your own small business (\”smallbiz\” or \”SMB\”). Welcome! It’s one of about 3,987 decisions you will have to make. Presuming you’ve already selected a name, for Illinois citizens – at least checked the name with the Illinois Department of Business Services, and then registered your domain name, the next important step is deciding on your business’s legal entity. In most states, including Illinois, business entity choices are; Sole proprietor, Partnership and its various forms, Limited Liability Company (LLC), or Corporation and its various forms, including Subchapter S Corporations (S-Corps). Because individuals tend to believe, however erroneously, that business owners are wealthy, business owners are often litigation targets. Accordingly, it’s unreasonable to operate a business today without some type of legal liability shield in addition to your insurance, which is lacking if you\’re operating as a sole-proprietor or even a partnership. Limited Liability Partnerships (LLPs), while providing limited protection, are not as owner-friendly as LLCs and corporations. Consequently, the use of partnerships has declined substantially. A smallbiz owner is typically advised to choose a LLC or corporation. By doing so, not only can the business take advantage of the legal liability shield, the owner can “pass through” the income profits and losses to his or her individual tax returns. A LLC is treated like a partnership for tax purposes and shareholders of a corporation that selects S-Corporation (S-Corp) treatment can pass through profits or losses. So, unlike C-Corporations, no double-taxation occurs with LLCs and S-Corps. Smallbiz owners tend to prefer LLCs over S-Corps because LLCs, which can also elect S-Corp tax treatment, require fewer formalities. S-Corps require annual shareholder meetings, corporate record-keeping, and quarterly tax filings. Additionally, the Illinois LLC Act allows for either narrow or expansive provisions in a LLC’s Articles of Organization and Operating Agreement. LLCs also offer other advantages, including: an unlimited number of shareholders, no citizenship requirements, few restraints on purpose or asset class, and different stock classes. Still, LLCs that don’t select to be treated as S-Corps, must pay estimated self-employment tax on all income received whereas S-Corps are not required to pay income tax on profits held for reasons other than employee wages. Also, if one depends on profits for your wages, as a single-member LLC (SMLLC), you may lose earnings if your business is sued and no distributions can be made without settling the judgment first. As a smallbiz owner, your entity selection depends on how much flexibility you want and what your current situation dictates, i.e., how much capital you need, how much liability protection you need, and the type of business partners you have. LLCs require less administrative work than S-Corps but capitalization needed for growth is often obtained from institutions that require a record of formalities, which S-Corps also require. Still, an LLC can, through its Articles of Organization and Operating Agreement, require all the formalities of a corporation and more. So… Now, you only have 3,986 decisions to make. The Smallbiz Success Series: Decision 3 | Succeed Today | Personal & Practical Points | Relax & Retire
3 Tips on Succession Planning – Before Needing an Airbag
The previous article discussed succession planning formula for a more successful business today. This week I’ll briefly cover how succession planning helps improve retirement and more importantly, when that succession planning should begin. At its core, succession planning is about tomorrow, our “retirement.” And proper succession planning creates important retirement benefits. As an estate planner with a number of financial planning colleagues, I can attest to the fact that we may have several methods and vehicles to protect and grow your assets and with a proper succession plan, those options may increase dramatically. However, without a proper succession plan, the options could dramatically decrease. Added benefits to retirement include: Being able to withstand harsh bear markets; Having a more secure retirement because your plans are more realistic; Retiring more efficiently and with fewer adverse tax implications; and A Less stressful retirement, even if you experience 1 or 2 bumps in the road. Most importantly, a properly executed succession plan eliminates the need for a “garage sale.” So as I said previously, in addition to making more money, establishing and implementing a succession plan results in an even more successful business today and a relatively stable and peaceful retirement. Now, some of us have a good idea on when we would like to retire but there is an ideal time to start succession planning and that time is before opening your doors for business. If you incorporate succession planning when drafting your business plan, then you will ultimately use and allocate resources more efficiently and plan realistically. Moreover, you\’ll establish processes that are key to a successful business sale or shareholder transfer. You may also realize that the most important factor in executing a successful succession plan is having a well-developed successor. Sometimes, we don’t start actually planning at the beginning. Many of us just do and do and do without stopping and taking the time to think about where all this “doing” is leading. But even if you’re 10 years into your business with about 10-15 years to go, it’s not too late. You probably have some advantages, e.g., a steady clientele or a steady and established referral base; a solid understanding of the rules, regulations, and best practices applicable to your business; “brand equity” among your peers and in your community; staff, if you have them, who are loyal; and if you’re anal, like me, you have helpful processes and spreadsheets in place to get you through the day, week, month, year, and decade. Conversely, 10 years in you may have some disadvantages: too many processes, some of which are inefficient or redundant; and you could be stuck in a time warp working against yourself, treating yourself like an employee and your business like a job, instead of CEO and enterprise. New business owners even with great business plans are also disadvantaged because the business is…new. So mistakes are going to be made and newbiz owners won’t be able to plan for all of them. It is when the business shingle is rusty that folks should proceed quickly but with caution. At age 60-65, triage may be needed, but there\’s still hope. At 66 – 70, like Will Smith said in the movie, Independence Day, “I hope ya gotta an airbag!” And at 70 ½, I think land in Jamaica is reasonable. Knowing why and when to start succession planning, we can move on and discuss the personal and professional practical considerations..Next week! The Smallbiz Success Series: Decision 3 | Succeed Today | Personal & Practical Points | Relax & Retire
How to Create Value in Your Smallbiz Now
Recently, I spoke to a group of women business owners about succession planning. Some were in business for more than 15 years, others for 4-5 years, and others had just started. Because succession planning is an integral part of estate planning, over the next couple of months, I will share a few insights from that meeting for readers who are or who advise smallbiz owners. So, let’s get started… When considering succession planning, where WE are also our clients, we must ask ourselves 2 questions and answer realistically: (1) WHY are we planning and (2) WHEN is the best time to plan. We all know the obvious answer to why to make MORE MONEY for “retirement.” However, beyond making more money later, succession planning provides 2 ancillary benefits. One benefit is that it can provide a more successful business NOW; the second benefit is that “retirement” will not be chaotic. How does succession planning help your business now? As you begin succession planning, to ensure your plan’s success, you must shift your perspective from that of a “job holder” who happens to run the job to that of a CEO who runs a multi-faceted enterprise. This “multi-faceted enterprise” idea may seem a little wonky at first. But if you consider all the hats you wear during the week to accomplish all the functions needed to service your clients or customers, you’ll get the picture. With proper succession planning, even solo business owners eventually shift from doing everything to delegating non-critical components to others, freeing up time to address critical components, performing essential leadership functions, and doing some fun business activities, such as blogging, tweeting, or connecting in person. As you make this shift from job holder to CEO, finding personnel or appropriately using current personnel to perform non-critical client/customer functions, something else occurs to benefit your practice now and in the future: personnel morale increases and, consequently, personnel become more productive. By shifting our perspective, we become more conscientious when hiring, even interns or part-timers, and create more current value for our business. You will recognize – for the sake of your succession plan – the need to nurture, groom, and develop the talent. Today’s buzz word is mentoring. But these aren’t just mentees; these are individuals who work for you and who you want to continue working for you. As a solo or smallbiz, your talent development program may not be formal, but it should at least be a cognizable, supervisory, mentoring program with regular reviews and 30-60 minute “check-in” meetings. Now, you may wonder how you can afford to carve out this time in such a competitive environment like the one we’re in today. Frankly, that’s being short-sighted. Because if you’ve been mentored or supervised by an outstanding boss, then you can probably recall your morale lift and sense of pride you felt as you developed. You can also probably recall the converse, when you were treated like a minion, degraded, and dismissed. By providing personnel with meaningful tasks, constructive feedback, and respecting and giving them credit for their good ideas, we’re creating more productive personnel, thereby actually giving us more time to devote to VIP client and customer matters. This makes clients happier and happy clients are good referral sources. So this answers one of the “why\’s.” The next piece, will consider the other \”why.” Stay tuned… The Smallbiz Success Series: Decision 3 | Succeed Today | Personal & Practical Points | Relax & Retire
Consider the Sushi: 3 Critical Plans for Small Business Owners
One of the most critical tools a small business owner should use is a business plan. Having drafted an untold number of these for businesses over the course of many years, I know how time-consuming and arduous creating a solid, comprehensive business plan is. However, small business owners who don’t undertake and complete such an effort are playing a dangerous game. Most business plans involve a forecast of at least 3-5 years, anticipating profit, loss, and resource growth. However, what if the business owner falls temporarily ill at the end of year 2 or year 4 or wants to retire? Who will see the business succeed and what financial interests will the original owner be able to sustain for herself and her family? Small family-owned businesses typically operate under the assumption that “someone” in the family will take over. But that “someone” isn’t always the best person or even a competent person with respect to business management. Granted, who is best to manage the business other than the original business owner may not be the person in the forecast, either. This is why a business plan is a “working” document. Another critical step that should be discussed in your business plan is the reason underlying your business entity selection or lack thereof. If you’re a small business owner, it’s unlikely that you will have selected a c-corporation and more likely that you decided to operate as a sole proprietor or partnership. Hopefully, your reasons included liability protection, asset protection, and minimizing taxes. Let’s look at an example: Craig and Andre established a catering business as equal partners. Craig was the creative genius and Andre was the financial guru. In Illinois, they will be taxed individually and the partnership may be subject to unlimited liability for any debts or claims, e.g., if someone was poisoned by blowfish. If the partnership cannot pay the claim, then the liability will flow to Craig and Andre together and separately. Now, let’s say that Andre quit the partnership as an owner before the blowfish incident but retained a financial interest in the business, which he bequeathed to his son who was a great beneficiary but a lousy business manager. That interest, because Craig and Andre established a plain partnership entity, may become worthless. However, let’s say that after Andre quit but before the blowfish incident, Craig hired a competent accountant. He structured the hiring according to the business succession plan, and then converted the partnership into a Limited Liability Company (LLC) because he didn’t want the business to be subject to unlimited liability. Now, the business and the bequest to Andre’s son are probably safe. An LLC is a very popular tool among small business owners right now because of the safety nets it provides for owners and for their interests. So if you’re a small business owner, revisit your plan to ensure you’ve selected the right entity. You should also determine who should succeed you as manager and at least how and when to replace other critical functions if and when they become vacant. Finally, be sure to place information regarding family successors and financial business interests in your estate plan – the third critical plan. If you choose the right entity and the right successors, you don’t have to risk your business, your financial interests, or your non-business-minded progeny’s esteem.