In our brave new world of Medicare taxes on unearned income, higher marginal rates for incomes over $250,000;  State taxes in California topping off at 12%, what is a businessperson to do who owns a profitable business and who is putting profits back into the business?  There are several options.  (1) A Corporation while doubly taxed permits corporations to retain earnings at a low tax cost currently, however to take the profits out increase tax costs dramatically.  (2)  Another possibility is to reduce one’s ownership interest by some percentage so that a portion of the profits go to one’s children who’s earnings as less than $250,000.  This could reduce taxes significantly if the entity is an LLC or S Corporation.  With low gift tax penalties, one could gift a significant ownership percentage to one’s children now and allow the children to have a portion of the growth.  One could also create trusts to hold the ownership interests for the children under for example 2503(c).   This would give the children the fruit of the tree without giving them the tree and the parent would continue to run the company.   (3) Purchasing key man life insurance to be owned by your children or by a trust for your spouse’s benefit.  These are but a few of the options available to make income lower from your business.  We’d be glad to talk to you about these and other options in the future.

I was talking to an old friend of mine who mentioned that businesses don’t plan for succession.   And that is really something that needs to be reviewed.  In the past the problem for succession planning was death taxes.  For small businesses, estate taxes used to chew up the value.  Now death tax exemptions are $10 Million per couple (Federal only), some states still have lower limits.  So, what are the succession issues these days.

The first one is of course death or disability of the key person.  Who takes over when the king can no longer be king?    So, the question of the “who” is perhaps the most important question to be answered.  I remember reading the story of one business where a father died suddenly, and his family entrusted the business to a manager who exacted a great salary who was brought in from the outside.  The manager knew the business generally, but did not understand this business.  As a result, he made some changes to the business model that doomed the business to bankruptcy.  Another business, the owner provided for his successor and groomed that successor.  The business thrived and grew over time until the successors decided it was the optimum time to sell the business and they reaped a huge reward.  So, the lesson here is to try and home grow the successor.  Either be it a family member or a trusted employee.  The best manager grooms his  or her successor.  This permits the manager to retire, to die or to lose his or her mind in peace and permits his or her family to be provided for should one of these events occur.   And you know what, there is a 100% change that one of those events will occur.   Our next installment will talk about financial and tax strategies to prepare for the next step.  Stay tuned.

We’re back on-line.  I have lots of thoughts on lots of issues in the days and weeks to come.  We’ll need to talk about the Affordable Care Act.  I saw a great article today by Robert Samuelson in the Washington Post.

http://www.washingtonpost.com/opinions/robert-samuelson-the-fog-of-obamacare/2013/05/23/8ffaf340-c3ad-11e2-8c3b-0b5e9247e8ca_story.html?hpid=z2

Pay attention to the various strategies that various companies are using to deal with the Act.  Some are hiring less than 50 employees.  Others are trying to keep their employees under 30 hours per week.  Smaller Companies are dropping insurance or lowering wages to make up for increased costs.   What was supposed to be a boon is not the panacea it was thought to be.  Also note the size of the penalties.  An employer would have to pay more in premiums than the penalty in many cases.  If that occurs the money doesn’t go to health care it goes to the Deficit, as do the individual penalties.  So, the Government gets well on people losing their health insurance.  The law of unintended consequences.