Planning for retirement as a small business owner comes with its own set of challenges, and the earlier you begin preparing for the transition, the better.
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5 Insurance Policies Every Small Business Owner Needs
This is the weekend you have finally decided it’s time to start your own business. You’ve had enough of the corporate rat race and now you want to take matters into your own hands. After you determine whether you want to set up as a sole proprietor, LLC, S-Corporation, or C-Corporation, there will be a litany of items to strike off the checklist to make sure the business is up and running. One of the key areas that most small business owners ignore is getting the right type of insurance policies set up as they initiate their new businesses. Even as the business gets established, business owners often ignore getting the right type of protection in place to insulate their business in case of unforeseen circumstances. Here are five insurance policies every small business owner needs.
1. DISABILITY INSURANCE
The challenge that most new business owners don’t understand is that if you show no verifiable income, you’ll have no chance of getting disability insurance. This type of insurance is designed to protect your personal income in the event that you can’t do the duties of your own occupation. Make sure the disability insurance you purchase covers ‘own occupation’ vs. ‘any occupation’. In addition, ensure that you have a cost of living adjustment and a future purchase option to buy more insurance if your income goes up.
2. HEALTH INSURANCE
If you are leaving your corporate job, one of the questions is whether to continue with COBRA from your former employer or should you get an individual policy through the new federal exchange. Is the best idea to get a Health Savings Account attached to a high deductible health plan, a catastrophic insurance policy, or go for the PPO option with a lower overall family deductible?
3. BUSINESS OWNER’S POLICY
This type of policy is usually bundled in packs that would cover several different areas for a business owner. Many of these policies cover items such as property insurance, basic liability insurance, some vehicle coverage insurance, business interruption insurance, bodily injury insurance, and renter’s coverage insurance.
4. E & O INSURANCE OR PROFESSIONAL LIABILITY INSURANCE
This type of policy is usually bundled in packs that would cover several different areas for a business owner. Many of these policies cover items such as property insurance, basic liability insurance, some vehicle coverage insurance, business interruption insurance, bodily injury insurance, and renter’s coverage insurance.
5. LIFE INSURANCE (BUY-SELL INSURANCE)
Often, most people who make a transition into a business leave the bulk of their life insurance behind at their employer. Getting your life insurance policies in place before you leave your employer is a good idea. If you have a business partner, one important item to get squared away is setting up a buy-sell agreement to make sure that cash is in place to protect your families and the business.
There are another half dozen different types of insurance policies you will want to consider when you begin to grow your new business. Since cash flow may be tight, many new owners forego paying for these insurances to save on cash flow. However, growing your business while walking on a high wire is not the best advice. Get the right types of insurance policies in place and you will be able to focus on growing top line revenue without worrying about a time bomb ticking at your door.
THE CONTENT IS DEVELOPED FROM SOURCES BELIEVED TO BE PROVIDING ACCURATE INFORMATION. THE INFORMATION IN THIS MATERIAL IS NOT INTENDED AS TAX OR LEGAL ADVICE. IT MAY NOT BE USED FOR THE PURPOSE OF AVOIDING ANY FEDERAL TAX PENALTIES. PLEASE CONSULT LEGAL OR TAX PROFESSIONALS FOR SPECIFIC INFORMATION REGARDING YOUR INDIVIDUAL SITUATION. THIS MATERIAL WAS DEVELOPED AND PRODUCED BY HELLO MY NAME IS, LLC TO PROVIDE INFORMATION ON A TOPIC THAT MAY BE ON INTEREST. THE OPINIONS EXPRESSED AND MATERIAL PROVIDED ARE FOR GENERAL INFORMATION, AND SHOULD NOT BE CONSIDERED A SOLICITATION FOR THE PURCHASE OR SALE OF ANY SECURITY. COPYRIGHT 2019 HELLO MY NAME IS, LLC.
What Type of Corporate Retirement Plan Should I Use?
When it comes down to your employer offering a retirement plan, there are a lot of items to consider before making your decision of which type of plan to choose. Traditional retirement plans, 401(k), Roth 401(k), IRA, Roth IRA – the list goes on. We’ve broken down these five plans so you can easily decide which type of corporate retirement plan you should use. Keep reading to learn more!
Traditional Retirement Plans
These retirement plans are also called defined benefit pension plans. Once the most common type of retirement plan, defined benefit pension plans offer a specified amount each month. Not only do they consider how long you have been employed, but traditional retirement plans consider your salary history as well when determining the correct amount for your plan.
401(k) Plans
A 401(k) plan is a plan that allows you to defer some of your salary. Rather than getting a fixed amount in your paycheck each month for retirement, a 401(k) plan defers the money. 401(k) plans are typically not taxed until the money is taken out, and these plans are able to be adjusted as little or as much as you would like. In today’s day and age, this is the most common type of employer-sponsored retirement plan.
Roth 401(k)
A Roth 401(k) is a little different from a regular 401(k). This type of retirement plan offers the same benefits of a Roth IRA, but contributions to a Roth 401(k) are not tax-deductible. The earnings you receive from your investments are accrued based on a tax-deferred basis. To determine if you should use a Roth 401(k) or a traditional 401(k), you need to ask yourself if you think you will be at a higher tax rate when you are about to retire.
IRA (Individual Retirement Account)
An individual retirement account is an option that only is available to those with already earned income. This type of retirement plan is also one of the most popular plans to choose from. With an IRA, “Compounding money is a snowball effect—investment returns can be reinvested and generate more returns, which are reinvested,” according to Investopedia.
Roth IRA
A Roth IRA is different from a traditional IRA in that, “You may be eligible to take a tax deduction on your contributions in the year you put the money in, and then your withdrawals in retirement are taxed as income,” (O’Shea & Coombes, 2020). With a Roth IRA, you do not get a tax break on your contributions because you end up getting that tax break later.
As these are brief descriptions of the most common corporate retirement plans, it is best to consult If you are a high earner, and find yourself in a position of uncertainty around what accounts you should be utilizing for your savings, you should consult one of our professionals about which type of plan will work best for you.
Sources
Kagan, Julia. “IRA Plan.” Investopedia, Investopedia, 28 May 2018,
www.investopedia.com/terms/i/ira-plan.asp.
O’Shea, Arielle, and Andrea Coombes. “Roth IRA: How They Work, Rules to Know, Where to Begin.” NerdWallet, 6 Jan. 2020, www.nerdwallet.com/article/investing/what-is-a-roth-ira.
Business Owner Roundtable – Flemings UTC
California Wealth Transitions heads to Fleming’s in La Jolla for another installation of our Business Owner Roundtable Event Series.
Fleming’s Prime Steakhouse
Join us at Fleming’s on Wednesday, February 12th, at 6:00 pm in the Fireplace Room for an exclusive event and discussion around common issues business owners face when presented with an opportunity to sell their company.
We will have resident experts from California Wealth Transitions to discuss financial planning strategies to minimize your tax liability and prepare your estate for a liquidity event.
We will also be joined by First Trust who will share ideas for how to get the highest offers and best valuation for your business as well as the moves you should be making to prepare for an exit.
Business Owner Roundtable
Details of the event:
- Limited seating is available
- Dinner and drinks will be included
- The event will be held at Fleming’s Prime Steakhouse & Wine Bar La Jolla.
- 8970 University Center Lane San Diego, CA 92122-1085
- 858-535-0078
- https://www.flemingssteakhouse.com/locations/ca/la-jolla
- Wednesday, February 12th, from 6:00 pm to 8:00 pm.
We look forward to a great night and hope you can join us!
How to Sell Your Business When It’s Time to Retire
You might be wondering what the best practices are for selling your business as you approach retirement. From the beginning stages of your business to the success and reputation it currently holds, you have worked hard to get to where you are. Now, you are ready to retire. Keep reading to learn some of our tips for selling your business when you are ready for retirement!
Plan Ahead
When it comes to planning your exit from the business you built from scratch, you need to make sure you plan ahead. Timing is everything, as is being prepared. It is beneficial to make sure your business would be ready to sell immediately, regardless of when you plan to retire. Once you are ready to enter retirement, having a proper transition strategy is vital. This includes creating a plan for informing your employees of the upcoming change, as well as a financial plan to ensure you are prepared to sell your business. You also need to be well-aware of each step of the selling process. Being knowledgeable in the selling process will increase your odds of making a successful business deal.
Know Your Business’s Worth
You need to make sure you are aware of what your business is actually worth. To do this, you should take a look at your assets, liabilities, and past profits. Rather than rely on what you think your business might be worth, it is best to stick to the facts and numbers to make that judgement. Having an adviser look over your business’s documents is a great way to stay organized, be prepared, and help decrease the potential for risk.
Consider Your Day-To-Day in Retirement
Shifting from working 50-70 hours a week as a business owner to being in retirement is a huge change. Prior to selling your business, you will want to make sure you have plans for your days in retirement. As you transition from working more than full-time, you might find yourself looking for things to do. Making a schedule and determining how you want to spend your days in retirement is key to making the most out of your days. However, there are plenty of retirees that like to live their new lives without a plan or schedule, so if that is keen to your beliefs, go for it!
Whether you want to sell your business immediately or in the future, there are several factors to keep in mind regarding the selling process and the transition in general. If you are passing your business onto the next generation in your family, or selling to someone else, having the correct tools, strategies, and mindset will guide you along the way.
When it comes to selling your business, we are here to help provide you with the right financial tools. If you’d like to know more about the services that we provide here at California Wealth Transitions, contact us today!