Protecting your future as a small business owner

Business owners have taken a major risk just by starting their own business. However, there are ways to mitigate the risks you face. And there are steps you can take to ensure your own security and future. Here are a few ways to protect your future as a small business owner. 

Save for Emergencies 

You should have an emergency fund for both yourself and your business. An emergency fund for your business allows you to pay the bills without having to go into debt though your income has dropped off. This also gives you time to make smart cuts to the budget if sales continue to fall. A personal emergency fund allows you to pay for medical emergencies and other unplanned expenses without having to take cash out of the business you had allocated for productive purposes. 

Save for the Future 

An emergency fund covers the emergencies that hit us all at one point or another. However, small business owners also have to save for the future. Yet they’re less likely to do so than employees, since there isn’t a company pension or retirement plan for you to take advantage of. You need to create a savings plan yourself so that you diligently save for your eventual retirement. You can try to take advantage of your spouse’s 401K or Roth 401K. It has high contribution limits, but you’ll hit them sooner as a couple than as a single person. Nor is this an option if you’re single yourself. Individual 401K plans are only an option if you don’t have employees other than your spouse, and you’ll have to file IRS reports annually once the account is worth 250,000 dollars or more. 

Why You Want to Create a Company Retirement Plan 

Creating a retirement plan for your small business benefits your business, too. For example, it helps your employees save for their future. This eventually improves retention, since they aren’t going to quit for another firm that has a good retirement savings plan. If the plan requires them to contribute for so many years to be vested, that certainly improves retention. It helps you attract top talent, especially if it is in conjunction with a good benefits package. However, you want to set up a savings plan even if you don’t have employees yet. 

A plan like a SEP IRA is easy to set up. However, you can’t contribute for just yourself – all employees have to get the same amount or equal percentage of their pay. There’s no annual reporting until you take out earnings. It doesn’t have a catch-up provision like IRAs. 

The simple IRA is easy to set up and doesn’t require a lot of paperwork. It is an option for the self-employed and small businesses with less than 100 employees. This means you can set it up for yourself and add employees as they’re hired. There is a relatively high contribution limit. And those over 50 can take advantage of catch-up provisions. Employers can match the employer contribution, too, for a tax-write off. One benefit for your employees is that SIMPLE IRA plans are immediately vested. This may not aid retention, but it could aid recruitment. The only downsides are that you’re locked into the investments for at least two years, contributions count against your personal 401K contribution limit, and there are steep penalties for withdrawals before you turn 59 and a half. 

Defined benefit plans are good for the high-earning self-employed. Contributions are capped at over 200,000 dollars a year. You can contribute a flat amount, a portion of your salary or even a unit credit. It can sometimes be combined with other types of retirement plans. Plan fees and contributions are written off as expenses. This reduces your personal tax rate. The downsides of defined benefit plans include having to make the same contribution for at least five years and the complex legal process setting it up.

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