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 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. "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, 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.
