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Beyend 401 small buisness owners - Jean D.

Jean.D Beyend 401 small buisness owners - Wiley & sons , 2004. - 274 p.
ISBN 0-471-27268
Download (direct link): beyond401korsmallbusinessowners2004.pdf
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Common mistakes include:
a. Rushing to implement a plan
Business owners rush at year-end to implement a retirement plan to reduce current tax liability. To get a plan in place quickly, and at what appears to be low cost, the business owners implement plans offered by financial institutions.
Business owners need to be aware that financial institutions use retirement plans as a “wrapper” for their investment products. Financial institutions focus on investments and charge service fees that may not be clear to the business owner. Such fees include “loads” and service charges.
(continued)
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What Are the Options?
While these plans can work, often they are not the best choice for the business owner’s situation. Financial institutions tend neither to ask detailed questions about the employee picture nor to provide the required follow-up, such as updating plan documents, preparing tax filings, and monitoring compliance.
b. Not making required contributions for employees
The IRS estimates that there are thousands of SEP plans in which the employer is not making the required contributions on behalf of employees. With both SEP and SIMPLE plans, business owners must make contributions for eligible employees. Failure to do so allows the IRS to invalidate the plan and disallow the tax deductions.
As businesses grow and change, the employee picture changes. Hence, owners should review the plan periodically to ensure that all the requirements are being met.
2. Business owners willing to pay up-front design fees and annual administrative fees for retirement plans designed to maximize their benefit
A 401(k) plan with a profit-sharing component can be a good choice. With this approach, the 401 (k) plan has four “buckets”—the employee contribution, the employer match, rollovers, and a “profit-sharing bucket.” The amount contributed to the profit-sharing bucket can be allocated based on age so that older, more senior people can receive a significantly larger portion of the contribution, up to the maximum of $40,000.
Defined benefit plans are a great way for older employers to put away sufficient funds to achieve their target retirement income. With a defined benefit plan, a 50 plus-year-old business owner can contribute and get a tax deduction for $100,000
Part 3—Complex and Expensive Plans
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to $150,000 annually. Defined benefit plans work well when there are few employees and sustained profitability.
Common mistakes include:
a. Implementing 401(k) profit-sharing plans without sufficient fund assets
It may not be cost-effective to design and implement a 401(k) profit-sharing plan for payrolls below $500,000.
b. Implementing a defined benefit plan with too many employees or without sustained profitability
With defined benefit plans, the obligations to employees are fixed. So, if the fund balance declines, or profits decline, the business owner might be committed to funding a plan that benefits the employees, not the business owner.
Paul says that there is a “Grand Canyon” between the retirement plan options available to the business owner with payroll over $500,000 (who is willing to pay for plan design and administration) compared with the options for the business owner whose payroll is under $500,000. Whether the payroll is large or small, pitfalls exist. To get the right plan for their situation, business owners need to be clear about objectives and realistic about costs.
the company at a specific price and under specific circumstances. In theory, stock options create an ownership mentality among employees and motivate them to help the company grow and prosper.
Young and growing companies that cannot afford to pay high salaries use stock options to attract and retain key employees. Stock options are particularly attractive for public companies
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What Are the Options?
or companies that intend to go public because there will be a market for the stock.
Stock options are somewhat problematic in small businesses because there is limited ability to sell the shares. So employee shareholders cannot cash out or sell their stock unless and until there is a liquidity event such as the sale of the business.
Employee Shareholders Have Rights
Before granting rights to buy stock in your company, carefully consider the implications. Employee shareholders have rights, and you can experience major problems if you are remiss in handling stock options and stock ownership. Your shareholder agreement should specify how the shares of departing or deceased employees are to be valued and transferred so that you do not find yourself with unwanted shareholders. Sometimes the company buys back the shares at a stated amount, or alternatively, the other shareholders may buy the departing shareholder’s shares. Having this kind of agreement can help you avoid legal battles. Without a shareholder agreement, you may find yourself with disgruntled former employees or the heirs of your deceased partner as shareholders in your business.
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