Financial Strategies for Small-business Owners

If you're a small-business owner, you put your heart, soul - and most of your time - into your business. Unfortunately, sheer hard work doesn't always translate into financial security - so you'll need to take some additional steps.

Here are a few to consider:

Protect your business against the loss of a key employee. If you have an employee with valuable management or sales skills, and this person were to die unexpectedly, your business could suffer. That's why you may want to write a "key-person" life insurance plan on this employee. In its simplest form, key-person coverage pays cash to your company, which is usually the policy beneficiary, when the designated employee dies or becomes disabled. Key-person insurance also can be structured to fund deferred-compensation arrangements or buyout agreements between partners.

Avoid "raiding" business coffers to pay for personal expenses. Try to keep six to 12 months' worth of living expenses in a liquid account. Once you have established this "emergency fund," you'll be less likely to tap into your business' income or assets to pay for unexpected personal expenses, such as a new appliance, a costly car repair or a large medical bill.

Create a retirement plan for yourself. As a business owner, you're responsible for establishing your own retirement account. Fortunately, you have some attractive choices, including the following:

• SEP-IRA - You can contribute up to 25 percent of your compensation - as much as $49,000 - to a SEP-IRA. Your contributions are tax deductible and your earnings have the potential to grow tax-deferred until withdrawn. This plan offers you significant flexibility in making contributions for yourself and your employees. Plus, as an employer, you can generally deduct, as business expenses, any contributions you make on behalf of your plan participants.
• SIMPLE IRA - You can put in up to $11,500 - or $14,000 if you're 50 or older - to a SIMPLE IRA. As is the case with the SEP-IRA, your earnings have the potential to grow tax deferred. You can match your employees' contributions dollar for dollar, up to three percent of compensation, but no more than $11,500 (or $14,000 for employees 50 and over). Alternatively, you could contribute two percent of each eligible employee's compensation each year, up to a maximum of $4,900, regardless of whether the employee contributes or not. Contributions to your employees are tax deductible.
• "Owner-only" 401(k) plan - If you have no employees other than your spouse, you can establish an "owner-only" 401(k) plan. Between salary deferral and profit sharing, you can contribute up to $49,000, in pre-tax dollars, to your owner-only 401(k), or $54,500 if you're 50 or older. Like a SEP-IRA and SIMPLE IRA, a 401(k) provides the potential to accumulate tax-deferred earnings. But if you open a Roth 401(k) your earnings have the potential to grow tax free, provided you've had your account at least five years and you don't start taking withdrawals until you're at least 59-1/2. (However, you make Roth 401(k) contributions with after-tax dollars.)

Your tax or financial advisor can help you decide which retirement plan is right for your business. But don't wait too long to choose one, or to make the other moves necessary to help you make progress toward your financial goals. When you own a business, time flies - so make the right moves today.