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.
Ralph Hershberger is president of SCORE Southern Arizona, a nonprofit group that offers free small-business counseling and mentoring by appointment at several locations. For more information, go to www.southernarizona.score.org, send email to firstname.lastname@example.org or call 505-3636.