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Shop Management/The Future is Now

Even if you’re 30 years from retirement and 40 years from death (so you think), it’s still in your – and your loved ones – best interests to plan for these events.

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In fact, it’s never too early to start planning.

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Establishing a retirement plan – for you and
your employees – will secure everyone’s futures and build employee
loyalty, which helps decrease turnover. Establishing a written
succession plan in case of your death or your partner’s death
will make your family’s life easier, and it will also ensure that
the transition doesn’t spell death for your business.

Regarding Retirement

In not much longer than the time it takes
to change a pair of wiper blades, you can establish a retirement
plan and reduce your tax bill by thousands of dollars. The Simplified
Employee Pension (SEP) is not only the simplest retirement plan
available, it’s also the only one that can be established after
the end of your fiscal year up until your business tax-filing
deadline.

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SEPs can be used by any type of business –
corporation, partnership or sole proprietorship – and they’re
especially well suited for small-business owners who have neither
the time, nor the money, to devote to the administration of a
traditional pension plan or 401(k) plan. You can establish a SEP
by filling out a simple form and designating the amount to be
contributed for the year. Model SEP forms are available from the
IRS and from most financial-services companies.

SEP-IRAs have been around since the 1970s
and have been increasing in popularity in recent years as regulatory
changes have made other options increasingly burdensome. SEPs
are particularly popular among companies in the automotive field
because of the ease in which they can be initiated and maintained.

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As easy as these plans may be to start, many
businesses still have no retirement plan for the owners or the
employees. In fact, less than one out of five businesses with
25 or fewer employees have any type of retirement plan at all.

  • SEP-IRA – Using a SEP-IRA, you make contributions to IRA
    accounts based on a percentage of pay. Using this SEP, you can
    contribute up to 15 percent of your pay to an IRA account – up
    to a maximum of $30,000 as long as the same percentage is contributed
    to employee IRA accounts. The tax advantages for SEP-IRAs are
    much greater than for normal IRAs. All SEP-IRA contributions are
    tax deductible to the business – including contributions to employee
    SEP accounts – and earnings on the funds are tax deferred until
    withdrawn. Typical IRAs allow individuals to deduct a maximum
    of $2,000 a year, but many individuals are ineligible for a tax
    deduction.

SEP-IRAs also are flexible. Annual contributions aren’t mandatory
– you can contribute anywhere from zero to 15 percent of your
income in any given year.

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While SEPs are relatively simple, keep in mind that no one type
of retirement plan is suitable for every business. Many factors
should be considered, including employee turnover, potential business
growth, employees ages and your relative need to provide for your
own future and for the future of your employees.

With a financially sound retirement on the line, however, you
should review your options sooner rather than later.

Successful Succession

Few occurrences disrupt any repair shop or other small business
as much as the death of an owner. Yet fewer than half of all small
and mid-sized family-owned businesses have a written succession
plan.

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The issue of succession planning is especially important to repair
shops with more than one owner or partner. Without a succession
plan that spells out what will happen to a deceased owner’s stock,
you may find yourself partners with uncooperative or unqualified
heirs, an outside party or even your competitor – all with disastrous
results for your business. For example, ask yourself, "Do
I want to be partners with my partner’s wife [or children]?"

Generally, the all-important Buy-Sell Agreement ensures that you’ll
have the first right to buy out your partner’s ownership interest
from his estate and that his heirs receive a fair price for it.
Even when a well-drafted Buy-Sell Agreement does exist, funding
problems can still arise. For example, if at the time of your
partner’s death you don’t have sufficient cash to buy out his
interest from his estate, the agreement becomes virtually worthless.

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For this reason, choosing the best method of funding is an important
step in putting together an effective Buy-Sell Agreement. Equally
important is selecting the best structure for the agreement itself.

Because of its relative simplicity, the Stock-Redemption Agreement
can be very useful for many repair shops. Here, the business owns
life-insurance policies on each of its owners. When one owner
dies, the insurance company pays the proceeds of the policy to
the business, which then buys out the deceased owner’s interest
from his estate.

Stock-redemption plans, however, have some tax disadvantages that
often outweigh the advantage of simplicity. For example, there’s
no increase in the cost basis of the shares of the surviving owner
or owners, which may mean higher taxes if the business is sold
in the future.

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For this reason, a Cross-Purchase Agreement may prove more useful
to many shop owners. Here, the partners own life-insurance policies
on one another, and when one partner dies, the insurance proceeds
are paid to the surviving owner – who must use the money to buy
out the interest from his partner’s heirs. Under this method,
the cost basis for the surviving owner is stepped up, minimizing
taxes upon the eventual sale of the business while also guaranteeing
a fair share price to the deceased owner’s family.

Regardless of which method you choose, remember that succession
planning is an area that’s vitally important to the family of
every shop owner, particularly when the family relies on the business
as its primary source of income.

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The Future is Now

Retirement and succession planning need to be done before they
have to be done. By taking a few simple steps today, you’ll ensure
that the future – for you, your family and your employees – will
be secured.

Writer Barrett Butlien is a small-business planning specialist,
a registered representative of Allmerica Investment and a member
of the Automotive Industry Advisory Council (AIAC).

Check It Out

Consider the following retirement and succession tips now to avoid
chaos in the future.

Retirement-plan tips:

  • The Simplified Employee Pension (SEP) is the simplest retirement
    plan available – fill out a simple form and designate the amount
    to be contributed for the year.
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  • Using an SEP-IRA, you make contributions to IRA accounts up
    to 15 percent of your income.

  • All SEP-IRA contributions are tax deductible to the business
    – including contributions to employee SEP accounts – and earnings
    on the funds are tax deferred until withdrawn.

  • Succession-planning tips:
  • The issue of succession planning is especially important to
    repair shops with more than one owner or partner.

  • Generally, the Buy-Sell Agreement ensures that you’ll have
    the first right to buy out your partner’s ownership interest.
    If, at the time of your partner’s death, you don’t have sufficient
    funding to buy out his interest, the agreement becomes virtually
    worthless.
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  • Choosing the best method of funding, then, is an important
    step in putting together an effective Buy-Sell Agreement. Equally
    important is selecting the best structure for the agreement itself.

  • With a Stock-Redemption Agreement, the business owns life-insurance
    policies on its owners. When one owner dies, the insurance company
    pays the policy proceeds to the business, which then buys out
    the deceased owner’s interest. This plan, however, has some tax
    disadvantages.

  • With a Cross-Purchase Agreement, the partners own life-insurance
    policies on one another, and when one partner dies, the insurance
    proceeds are paid to the surviving owner – who must use the money
    to buy out the interest from his partner’s heirs.

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