Prepare for Business

  • START A BUSINESS

  • GROW YOUR BUSINESS

  • SUCCESSION PLANNING

Business owners are confident that success will come from the combination of an excellent product or service, hard work, and dedication. But experience teaches us that we need to be prepared for the unexpected in life as well as in business.  Planning for success and the unexpected begins before you start your new business, the planning needs to be able to adapt while you grow your business and continues while you create your Succession Planning program.

Each business is unique and requires a customized strategy to mitigating risk while maximizing opportunity but there are common strategies for each stage in a business's life cycle.

START A BUSINESS

“ Everyone who achieves success in a great venture solves each problem as they came. They helped themselves and they were helped through powers unknown to them at the time they set out on their voyage. They keep going regardless of the obstacles they meet.”   W. Clement Stone

Starting a new business, practice or venture requires a commitment of time, expertise and capital. This planning stage is the optimal time to speak with your financial adviser in order to protect your resources, attract and retain the talent you need and ensure that your business is primed for growth.

ProtectIon Tools:

  • Having a partnership agreement is an absolute imperative and should include buy/sell agreements, protection for all principals in the case of life cycle events such as death, disability, retirement, divorce, etc. that can impact the business.
  • The death or long-term disability of a business owner may lead to internal turmoil, customer erosion, and business disruption. A buy/sell agreement funded with life insurance and disability insurance may help prevent these problems from arising and potentially damaging your business.
  • Common tools used by many business owners are the cross-purchase plan or the entity purchase/stock redemption plan.
    • The cross-purchase plan is a plan where all the principals purchase a life insurance policy on the other owner(s). When an owner dies, the surviving owner(s) use the death benefit to purchase the deceased owner's share of the business as well as add a quick infusion of cash into a business that likely just lost an asset. The additional cash can also be used to calm nervous lenders and/or hire new people. This tends to be done when there are fewer owners.
    • Entity purchase or stock redemption plan is a similar idea except that the plan is between owner-employees and the business, where it is the business that buys the respective interests. This tends to be done when there are more owners and a cross-purchase plan would get complicated.

As a part of this agreement, the business purchases separate life insurance contracts on the lives of the owners. The business will pay the premiums and will be the owner and beneficiary. When an owner-employee dies, his or her share of the company will pass to the heirs of his or her estate. The business may use all or a portion of the proceeds from the policy to purchase the interest from the estate.

Not only used in cases of death and disability, buy/sell agreements provide employers with peace of mind knowing that their business will pass to capable hands by setting the parameters for an equitable and orderly transfer of wealth, ownership and management. If properly executed, these plans can provide the company and owner(s) with tax advantages, assures remaining owners that the deceased's share of the business will not pass on to someone who is unsuitable for the position and assures continuity for customers, creditors and employees.

GROW YOUR BUSINESS

“Without continual growth and progress, such words as improvement, achievement, and success have no meaning.”      Ben Franklin    

ATTRACT & RETAIN KEY EMPLOYEES

“The way a team plays as a whole determines its success. You may have the greatest bunch of individual stars in the world, but if they don't play together, the club won't be worth a dime.”   Babe Ruth

Good talent is critical to the success of your business. In today's competitive employment landscape, it is becoming increasingly more difficult to attract and retain top employees. With proper planning, HIG can help you attract personnel by enhancing your benefits package to compete more effectively using a combination of products and services, such as executive benefit programs, group health/dental/vision/life/disability/long-term-care plans, retirement plans, etc.,

As part of a good Attract and Retain plan, there are ways to make sure that the plans you put in place helps keep employees and with the right planning those same benefits can help protect your business. Using a variety of products that serve a dual purpose, these plans can also be advantageous regarding business succession planning and supplemental retirement offerings. One way to do this is to utilize life insurance products to provide protection and the opportunity for cash accumulation.

A business life insurance policy can be corporate-owned (COLI) or corporate-sponsored, individually owned (CSIO). With COLI the business owns the policy and pays the premium. The policy is a business asset that offsets future benefit obligations. With CSIO the business helps the employee buy the policy as a benefit and may help with premiums, but the employee owns the policy and may keep it even when employment ends.

Pay Yourself

“Say to yourself, 'A part of all I earn is mine to keep.' Say it in the morning when you first arise. Say it at noon. Say it at night. Say it each hour of every day. Say it until the words stand out like letters of fire across the sky.” Arkad, from George S Clason's 1926 “The Richest Man in Babylon”

It seems unnecessary to tell business owners to pay themselves, but it is important to mention. From the outset, owners should consider paying themselves and loaning the money back to the company. By doing this, you become a creditor to your own company, and you can pay back the loans, with interest, later when you would otherwise be in a higher tax bracket.

How you pay yourselves when the business is succeeding is also critical. Setting up supplemental retirement plans and/or executive bonus plans is another good way to make money in a tax-advantaged way. Even if you already offer a traditional 401(k) plan, you may want to give yourself and your key employees a little more. A supplemental retirement plan gives you and your top employees a chance to save more once you've maxed out their contribution to a qualified plan, which can increase your retirement income, as well as Attract and Retain employees.

Nonqualified Deferred Compensation Plans

One of the ways you can do this is through nonqualified deferred compensation plans. There are no formal funding vehicles required for these type plans, but for the example, below we'll assume corporate-owned life insurance (COLI) is the funding vehicle because of the tax advantages it can offer. The benefits to the business owner, besides to Attract and Retain, is it requires less administration with fewer funding requirements than typically qualified plans, the business gets to choose who receives benefits, when they receive them and how much they receive, unlike qualified plans, the death benefit from the insurance funding can allow the business to recover costs and there is a tax deduction when employees receive compensation from the plan.

Executive Bonus Plans

Section 162 of the Internal Revenue Code is the section that states that an employer may deduct certain expenses-including salary and other compensation-that are ordinary and necessary business expenses.  It is in reference to this Code section that certain nonqualified plans, known as executive bonus plans, are sometimes referred to as Section 162 Plans.  An executive bonus plan is one in which an employer pays the premiums on a permanent life insurance policy owned by an employee. This is designed to motivate executives. In addition, the life insurance policy that provides the vehicle for the plan enables executives to make additional premium contributions. Besides providing a death benefit, the cash value in the policy may provide supplemental income at retirement.  While the supplemental retirement income may be in addition to a qualified retirement plan, it may also be the only retirement plan that the employer offers-at least at the early stages of the company.  As in all nonqualified plans, the executive bonus plan may simply be used by the employer to provide special treatment to a key executive in compensation for his or her contribution to the success of the company.

The employer's bonus in an executive bonus plan is accounted for as salary to the executive.  As such, it is generally deductible to the employer and taxable to the executive.  It is important to keep in mind that the premium payment made by the employer is deductible only because it is compensation, not because it is a nonqualified plan contribution. Flexibility here is great because you can design it any way you choose.  Although it is not required, many employers try to tie bonus payments to the executive's meeting of predetermined corporate goals.  As a result, if someone performs poorly, he or she receives no bonus.  If the benchmarks are met, the bonus can be substantial.  Not surprisingly, the bonus arrangement works most effectively when the business clearly identifies the results it will reward. 

SUCCESSION PLANNING

“For nature gives to every time and every season some beauties of its own; and from morning to night, as from the cradle to the grave, it is but a succession of changes so gentle and easy that we can scarcely mark their progress. “   Charles Dickens

It can be strange to think that one day you won't be running your business but if things work out the way you want, that is what will happen. Why plan for it while setting your business plan? Simply, because insurance will most likely play a part in the plan and you want to set this up before there are the inevitable changes to health that prompt a rise in premiums, or in the possibility that you no longer qualify. 

A business succession plan is far more than a legal document; it is a comprehensive estate planning tool that can include everything from your buy-sell agreement and management plans to any relevant steps to keep the smooth operation of your business. Traditional estate planning is usually focused on tax minimization, and while the business succession plan may include that, its aim is primarily at maintaining the health, life, and legacy of your business.