Many prior columns have addressed the problems and challenges of starting or running a small business - strategic choices, finding customers, cash flow, managing personnel, etc.
One might ask, "Why would anyone do this?"
People start companies for a variety of reasons. They are creative types, or long to control their own work environment, or believe a startup is the best option to generate personal wealth.
Even though very few startups "go public" - allowing owners to cash out with a stock IPO (initial public offering) - there are several avenues for sole owners to accumulate a sizable nest egg, even before they sell the business.
The most effective tools are profit-sharing plans that are structured as 401(k) accounts. These plans have multiple requirements, and it is highly advisable that you retain a professional to establish and manage the reporting requirements.
These are the basic elements of these plans:
• All employees who work 1,000 hours during the year must be included.
• The company contributes a minimum of 3 percent of the employee's earnings into the plan.
The benefit to the owner is the ability to shelter far more money than a standard 401(k) plan offered to employees at a large company. If the company contributes an additional 2 percent to the employees' accounts (5 percent total), the owner may shelter an additional amount.
How much? For a business that clears $200,000, the owner can shelter up to $55,000 total. Remember that most most small businesses are incorporated as an LLC or PLLC (limited liability company or professional limited liability company) and the owner cannot draw a salary. All profits are assumed to flow to the owner.
These sophisticated plans are especially attractive to businesses that are very profitable and have a few employees. Your accountant can run the various scenarios to ensure compliance and to optimize your plan. Make sure you work with an expert.