Getting Bigger Thinking by Smaller Businesses

Getting Bigger Thinking by Smaller Businesses

Guest Columnist



Bruce Weide

Most small business owners bust their guts taking personal financial risks to build a business, until finally one day they pass that make or break point of profitability. And just as their hard-earned rewards are due to come to them (i.e. ever increasing profitability margins), now they have to worry about the IRS taking it all back? Is that just the way it is?






It’s not true that you can’t keep your profits in the corporation without being subject to “double-taxation.” It’s also not true that a Qualified Retirement Plan is the only way to get pre-tax income out of a corporation. Can you honestly envision Bill Gates’ CPA telling him, “Well Bill, you’ve hit your $50,000 limit on pre-tax income in your Profit Sharing Plan this year. You’ll just have to bite the bullet on the other $100 million.”






Now, I may not personally know what Mr. Gates’ specific strategies are, but I can bet how long that sort of a CPA would last in his lion’s den.






The problem we generally see with too many small business owners is that the concept of retirement planning is dreadfully confused with strategies for wealth retention. So they think of their Qualified Retirement Plan as the only wealth retention strategy available to them. It’s apples and oranges. And with all due respect, many CPAs and financial advisers often don’t get it either.






If you happen to find yourself in the same muddle, the crucial turning point for you will come that day when your business arrives at a stage of robust profitability. What’s “robust” is relative to your goals. For some small companies with only a handful of employees, that may be your first million in profits. For some mid-size companies it could be $100 million or more. The test is this Has your attention shifted in any way from building profitability to the taxes that will be due either corporately or personally? If yes, then it’s time to think beyond 401Ks.






Wealth retention strategies break into two broad approaches. 1) How to draft profits from the corporation to the shareholder by tax-advantaged means, or 2) Keeping retained profits in the corporation without subjecting them to naked exposure to corporate taxation.






Tax-advantaged profits






Let’s say that you are a sole shareholder with a corporation seeing $1 million in profits and your standard of living requires only about $250,000 for you to live on. You have maxed your 401K contributions at $13,000. Or worse yet, you can’t take $13,000 because with your employees only rarely participating in the plan you have become “top heavy” and your plan administrator has just informed you that you have to take some of that $13,000 back out.






For such a case there is a plan model available today that will allow a.) $1 million of contributions annually (maybe more), b.) Can be set up on a discriminatory basis, where you are not obligated to fund for your employees, c.) Contributions are roughly 75 percent tax deductible (meaning a $1 million contribution reduces your tax liability down to $250,000) d.) Contributions are placed into a variety of investment options e.) Withdrawals of principal or gain may escape income tax and capital gains taxes if properly structured and can be taken before age 59