There are more than 300,000 businesses in Georgia, and as 2017 is coming to a close, many of these are small business owners celebrating another successful year. But it’s time to prepare for 2018 and make certain the New Year also gets off to a fast start.
As a financial advisor that works closely with small business owners, here is a quick checklist of items I recommend they review before closing up shop for the holidays:
Review Buy-Sell Agreements.
These legal agreements between co-owners will determine how a business is transferred if a co-owner dies, chooses to leave or is forced to leave the business.
As the economy has grown during the past several years, many small businesses are now worth much more – possibly tens of millions of dollars more – than they were just a few years ago. Many buy-sell agreements may be out of date and could lead to significant problems for both the business and your family if an emergency arose.
Several years ago, I worked with a business that had earned well over $1 million in the previous year. But when one of the owners became disabled, the entire business fell into bankruptcy. With good planning, this scenario could have been avoided. Here are key points to consider in these agreements:
• How will the value of the business be determined in the future, and in the event of an emergency?
• How will the cost of a transition in ownership be financed? Should you consider a key-person life insurance policy – which is paid to the company if that person dies unexpectedly — or is there another option?
• Make certain there is a reasonable amount of disability insurance for key individuals. Many times, the emergency is only temporary, and insurance can provide a bridge until the business is back up and running.
Examine Your Client List.
It’s still true; many businesses receive 80 percent of their revenues from 20 percent of their clients. Identify these key clients and determine how you can better serve them in the upcoming year.
Conversely, most of a business owner’s headaches are caused by a small fraction – often five percent, or less – of their customers. Now is a good time to check the company’s income statement, review client profitability and, if needed, cut the difficult ones loose before 2018. While you may initially miss the revenues, you’ll have more time to care for your best clients and also expand your business.
Take Steps to Save on Taxes.
Business owners can save their profits and reduce taxes by opening a Simplified Employee Pension Individual Retirement Account. These accounts are generally easy to set up and administer.
An individual 401k plan requires more time to administer, but may allow even larger contributions and further reduce taxes. For business owners, it’s possible to contribute as much as $54,000 for people under 50, and $60,000 for those 50 and older. For 2018, these maximums will both increase by $1,000.
To help the business’s bottom line, determine if there are any significant expenses planned for early 2018 that can be paid in December, thereby providing a tax deduction for 2017. Likewise, if there is a contract where billing can be deferred until January, those revenues can be pushed into 2018.
Review Year-End Revenues and Expenses.
After a successful year, small business owners want to reward their employees for a job well done. Take time now to decide and allocate money needed for employee bonuses and withholding taxes. Remember that bonuses are subject to income tax withholding, FICA and other taxes, just like regular pay.
In addition, make certain to pay vendors and contractors in full by year end. And remember that each contractor will need a 1099-MISC form by Jan. 31.
Finally, many small businesses live and die by their cash flow, so purchase some accounting software and make cash flow projections for next year now. Make certain there’s enough money available to cover upcoming year-end expenses while keeping an appropriate cash cushion as you enter 2018.
Nathan Corbitt is a wealth advisor for Brightworth, an Atlanta wealth management firm with more than $3 billion in assets under management.
