Carefully Evaluate Services Offered By Defined Benefits Plan Provider

If you started your business a few decades ago – say, during the era of bell bottoms, Sonny and Cher and headbands – and you were considering how to provide a retirement benefits plan for your employees, you may well have chosen a defined benefits (DB) plan. Indeed, if yours is a small, closely held company with just a few employees, and you are close to retirement, having a DB plan might be your best tax and investment strategy.

A weakened economy – with profits harder to come by – may have you asking whether you are getting the biggest “bang for the buck” with your plan, as well as more questions, such as: Can 401(k)s – now the main retirement benefit for the largest percentage of the workforce – produce better results? Can I change other features of my plan as the company’s fortunes ebb and flow? How well does my plan provider respond to my questions and employees’ needs?

Once widely popular, DB plans have lost favor because of cost and the ever more stringent laws affecting them. However, many employers hold on to them because they offer secure, stable retirement income.

Employer-Funded Plan

Defined benefit plans are long-term agreements – a minimum of five years through which employers promise to provide retirement benefits for employees. No matter what happens to the profitability of the business, whether it enjoys good years or suffers through lean ones, the defined benefit plan must be funded by the employer.

As an employer, you have fiduciary responsibility to make sure that funding occurs. Contributions, calculated yearly, depend on a variety of factors. You, as business owner, your investment team and your actuary should work together to monitor the plan and ensure that all IRS compliance issues are addressed.

Provider Check-Up

Ideally, your DB plan provider will work closely with your investment team and/or plan manager. Experts advise business owners to have a qualified actuary supervising the plan. To make sure your plan is meeting your company’s needs, it’s also a good idea to review your provider's parent company (see the accompanying checklist).

(Download Checklist)

New Hybrid DB/401(k)

The Pension Protection Act of 2006 authorized another option that you may want to explore – a defined benefit plan with a 401(k) feature [DB/401(k)]. Available only since January 1 for businesses with between two and 500 employees, it offers certain advantages over traditional DB plans. Employees may contribute pre-tax dollars up to the 401(k) limit ($16,500; $22,000 for anyone 50 or older), while the employer match may be up to the limit for such a defined contribution plan ($49,000). Expect to hear more about the DB/401(k) plan as 2010 unfolds.

No matter what plan you offer, it’s no secret that making a profit in these tight times is no easy task, and holding on to valuable employees through benefits packages can be even trickier. It’s important, then, that your DB plan is administered and monitored well, and that both you and your employees are pleased with the services you receive from your benefit provider.

You can find more information at irs.gov, dol.gov and pbgc.gov. In addition, I’ll be happy to provide any assistance you need. Feel free to give me a call.

Economic Outlook: Confidence Restoration Would Boost Recovery

The U.S. economy appears to be recovering from its worst financial crisis since the Great Depression. Normally, recoveries from severe recessions tend to be sharp as housing and auto sales snap back.

However, it will take some time to work through the current financial difficulties. This recovery is expected to be gradual and somewhat fragile, sensitive to any negative shocks that may come along. In contrast to the downturn, when bad news fed on itself, we could see the development of positive feedback loops in 2010. A little good news could induce consumers to spend more, businesses to invest more and banks to lend more. That’s how recoveries gather steam.

Small businesses have played a significant role in the recession and the ensuing recovery. While the housing bubble, excessive lending in subprime mortgages, high degrees of leverage and under-regulation all played a part in the economic downturn, a major factor was the financial panic in the fall of 2008. One doesn’t simply un-panic. It takes time for confidence to be restored.

Credit Distress

Credit disruptions started at the high end in late 2008, with major global banks unwilling to lend to each other due to fears about counterparty risk. Interbank lending has now recovered, but credit problems spread quickly to small- and medium-sized banks. Terms and conditions for all types of consumer and business loans were tightened in late 2008.

Many small firms found their lines of credit scaled back or even cut completely – and small firms rely on bank credit to meet payrolls and stock inventories. Banks continued to tighten terms and standards for business loans throughout 2009, but as the year wore on, a smaller percentage did so.

Bank lending should loosen up in 2010, helping to reinforce the economic recovery, but it’s likely to be a gradual transition. Bank lending is critical for small firms, which accounted for a third of new job growth in the two previous expansions.

During the recent downturn in the labor market, small firms accounted for an unusually large share of job losses – a sharp contrast to the 2001 recession.

Stimulus Role

In the federal government’s $787-billion fiscal stimulus package, some funds – but not many – were allocated to help improve the flow of credit to small firms. Small firms have benefited from government spending projects, but that’s not a long-term solution. The Federal Reserve has bought securities backed by small business loans, theoretically freeing up funds to make more business loans.

The fiscal stimulus helped support the economy in 2009, but, in hindsight, funds should have been more directly funneled to job creation and to small businesses.

We may see further stimulus efforts in this vein in early 2010, although there is growing political restraint to further government spending, regardless of how much it may be needed. It’s unclear whether Congress will be willing to use returned TARP dollars to fund programs to boost jobs and increase small business credit.

Perhaps the main uncertainty now is what will happen to the Bush administration’s tax cuts, which are scheduled to sunset at the end of 2010.

In a fragile economic recovery, a tax increase would not be a good thing. The uncertainty regarding which of the Bush tax cuts might be extended (to support growth) and which might be allowed to expire (to reduce the budget deficit) will create some problems for investors and for the overall economy this year. Hopefully, healthcare reform will be resolved one way or another, reducing some uncertainty for small businesses.

*There is no assurance any of the trends mentioned will continue in the future.

The Importance of Choosing Appropriate Incorporation

You’ve probably heard enough about the perils of running your business as a sole proprietorship to at least consider incorporation. If you don’t, you are not separating your business life from your personal one, and that can have disastrous consequences should trouble arise.

A corporation is a legal entity apart from your person, and that gives you a measure of protection in the event of lawsuits, for example.

You may already be happily incorporated. If not, you might consider the merits of various types of incorporation and choose the type most suited to you and your business model.

Types C through S

It’s important to structure your business in the most suitable manner, because it will affect all aspects of your operation, from your ability to raise capital to the extent of your liability and your taxes.

Unless you run a very large corpo-ration, you may want to avoid the C corporation, with its strictly regulated corporate formalities and double taxation (after-corporate-tax dividends are taxed again when paid to shareholders).

The Closed corporation model has some appeal for small business, as it issues stock held by one person (or up to 30), needs no board of directors and may restrict share transfers. But this type of incorporation doesn't exist in every state.

The Subchapter S corporation is ideal for many small businesses. It is similar to a C corporation, except that income passes through to shareholders without double taxation. There is limited liability protection, a limit of 75 shareholders, limited ownership rules and a special status that provides a tax advantage. It is subject to con-siderable government regulation, however, and nonresident aliens may not be shareholders.

The Limited Liability company (LLC) combines a corporation’s limited liability status with the simple structure and tax advantages of a partnership or individually owned business. LLCs are not restricted from foreign ownership.

The LLC has restrictions on the transferability of ownership, may have to be diluted at the death of an owner and usually has a limited lifespan (unlike the S corporation, which can go on forever).

The three Partnership variations may hold some attraction for certain small businesses, although partners do not escape certain liabilities and there are other restrictions. No matter what type of incorporation best suits your personal situation and your business, choosing the most appropriate one for your business model is a decision that should be made only after carefully considering and investigating all the possibilities.

Budding Entrepreneurs Need Reality Check for Success

You undoubtedly know that the ideas that spur someone to become an entrepreneur can be wrapped in a gauzy cloud of unreality. You may have had to work through this notion yourself as you built a successful business, so it may be helpful to share some reality with relatives or friends who tell you they’re ready to stop working for someone else and strike out on their own because they envy the “freedom” of owning and running their own business.

Budding entrepreneurs should have their feet planted solidly on the ground. Remind them that in addition to having a winning idea or superior technical know-how, successful small business owners also:

• Research and test business models, running ideas past professionals, not friends inclined to tell them what they want to hear.
• Do a thorough breakeven analysis as their guideline to financial resources, client base, sales and other essential numbers.
• Devise marketing strategies. Customers can’t support a business unless they know about it.
• Build a comprehensive budget. Include babysitting, if necessary. It’s usually a fantasy that a new entrepreneur, working from home, will have extra time to spend with children. Neither the children nor the business should be shortchanged.