Thursday, March 20, 2008

Updates

Just posted a new article on how to get and keep long-term capital for your small business on this blog, provided by courtesy of our friend Robert L. Breen; and the article can also be found in our new April issue.

Also just added on our website is our featured article of the month, which is an article on how to maximize your insurance spending to find the best deal with the best coverage. Each month we will post our featured article in a word doc so that way you can easily find it and store it.

Featured articles can be found at www.aptmags.com/featured

Long-Term Capital Planning for Small-Business Owners

Small-business owners need a financial strategy that supports a flourishing business and provides for a satisfying retirement.

Running a small business can be more than a full-time job. In the beginning, you typically have to spend tremendous amounts of cash for equipment and marketing while working many hours a day building your operation. Once your business is established, maintaining and building cash flow becomes the main priority. But meanwhile, business owners must also see to the financial needs of their families.

Creating a capital plan that keeps your business operating — and flourishing — while giving you the personal financial flexibility to send your children to college and retire comfortably is paramount. “How much business owners pay themselves depends on a number of considerations,” says Carlton Brown, an Estate Planning Specialist with Wachovia Securities. “It depends on the stage their business is in, what the person’s lifestyle is and, most importantly, how close they are to retirement.”

Depending on personal considerations, owners can structure their business in a way that helps them meet their own financial goals. Factors that influence a small-business owner’s capital strategy should include:

The company’s legal structure.

The business’s capacity to borrow for growth.

The owner’s ability to take money out of the company to invest in a retirement plan.

Legal Structures for Small Businesses

“Deciding what kind of legal structure you have and how it affects the business’s capital strategy depends on the kind of business you are running and how much flexibility you need,” says Martin Scoll, Vice President of Life Event Services for Wachovia Securities. Small businesses typically fall under two types of legal structures: sole proprietorships and incorporated businesses.

In a sole proprietorship, the company’s assets, liabilities and risks belong to the owner. Sole proprietors report and pay business taxes as part of their own IRS return. If you are a sole proprietor, you have much more flexibility with the business’s finances and cash, making it a lot easier to pay yourself and invest the money.

However, as a sole proprietor, you may find it harder to borrow money for your business, because your personal credit becomes a factor. Sole proprietorships are great for small retail or food operations that will have predictable, non-cyclical revenues and expenses and are less prone to lawsuits.

C corporations are the most common type of incorporated businesses. A C corporation’s income is legally separate from the owner’s personal finances. If the company is sued, the individual owner’s assets cannot be touched. With a C corporation, owners must receive a salary or a dividend as income. Dividends are taxed both at the corporate level and on your personal income tax return as capital gains, whereas your salary would only be taxed as personal income. Also, if you need to borrow a tremendous amount of money to grow, running an incorporated business is usually the best option.

Other incorporated business choices include a limited liability company and an S corporation. Both of these options give you the flexibility to take business profits out of the company without being taxed by the federal government (and usually the state, too); you only have to pay taxes on the 1040 you personally file with the IRS. While both structures help you to avoid double taxation, they also come with strict management and tax rules.

To fully understand the pros and cons of your business’s legal structure and to decide which works best for your own needs, talk to your accountant, your lawyer and your Wachovia Securities/Wachovia Securities Financial Network Financial Advisor.

Borrowing Versus Reinvesting Profits

“Different businesses have different needs at various stages,” says Scoll. “At the beginning of the business, you will likely need to borrow money from a bank for start-up costs and reinvest all your profits in order for it to grow.”

Once a business becomes profitable, it will need a fixed amount of capital to continue growing. You can address these costs by either borrowing the money or reinvesting the profits back into the company. If interest rates are high and it costs you more to borrow than you could earn reinvesting the profits outside the company, it would be wise to reinvest most of your profits back into the company’s operation. If the opposite is true, borrowing from a bank to fuel your company’s growth while taking profits out to invest in your personal portfolio may be a smarter choice.

According to Brown, it is wise to take some money out when you can afford to do so. “Plowing all your profits back into your company rather than taking them out and reinvesting them is similar to buying one stock rather than a diversified portfolio,” he says. “That can be dangerous. If your company goes out of business, all of your resources are gone. If you have reinvested some of the profits elsewhere, you have some ground to stand on.”

Saving for Retirement

Once you’ve decided how you want to spend your retirement, you can begin crafting a retirement plan that suits your needs with the help of your Financial Advisor and your accountant. “Being in constant contact with your accountant is time well spent,” says Brown. “A good accountant can help you know when and how much money to take out of your business so you can reinvest it for your retirement or personal needs.”

Once you have determined how much you can take out of your business, there are a multitude of savings and retirement options available to small-business owners, including:

IRA accounts specifically created for self-employed individuals or small-business owners. These often have flexible annual funding requirements with a full range of investment choices.

Unique 401(k) plans that work just like the 401(k) plans of larger corporations, but have potentially higher contribution limits than self-employed IRAs.

A SEP, or Simplified Employee Pension Plan, which has been crafted specifically for small businesses.

Remember that small-business owners should also tap into asset classes available to the average nine-to-five worker. Consider putting money into mutual funds to diversify risk, 529 savings plans for your child’s college tuition and expenses, or alternative investments to add opportunities not available in regular equities.

No matter how large or small your business is, adopting a sound capital strategy is a smart way to ensure that you have a successful operation at work and a comfortable lifestyle at home.

Together, we can discuss:

The stage your business is in, as well as coordinating with your legal/tax advisors to discuss which legal structure best meets your needs.

How to maximize the money you are able to take out of your business to meet your current cash needs.

Setting overall retirement goals — and crafting a plan to achieve them.

Wachovia Securities/Wachovia Securities Financial Network does not render legal or tax advice.

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Wachovia Securities is the trade name used by two separate, registered broker-dealers and nonbank affiliates of Wachovia Corporation providing certain retail securities brokerage services: Wachovia Securities, LLC Member, NYSE/SIPC, and Wachovia Securities Financial Network, LLC (WSFN), Member FINRA/SIPC.

The accuracy and completeness of this article are not guaranteed. The opinions expressed are those of the author(s) and are not necessarily those of Wachovia Securities/Wachovia Securities Financial Network or its affiliates. The material is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Provided by courtesy of Robert L. Breen, a Senior Vice President-Investments with Wachovia Securities in Anaheim. For more information, please call Robert at (800) 300-4428 or visit his website at www.breen.wbsec.com. Wachovia Securities/Wachovia Securities Financial Network, LLC, member FINRA and SIPC, is a separate nonbank affiliate of Wachovia Corporation. ©2008 Wachovia Securities, LLC.

Investments in securities and insurance products: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE