Business owners are faced with many challenges.  How can I reduce my
taxes? How can I get and keep quality employees? How can I save for retirement? The answer to these questions may involve the right retirement plan for your business.

 What Are the Options?

Retirement plans have been around for decades but in recent years, the traditional pensions of the past are not as common. Today’s retirement plans are usually one of the IRA-Based plans,  a defined contribution plan or the more traditional defined benefit plan. 
 


IRA-Based Plans

IRA-Based plans include Payroll Deduction IRAs (PD IRAs), Simplified Employee Pension Plans (SEP) and Saving Incentive Match Plan for Employee IRA (SIMPLE IRA).

PD IRAs and SEPs are easy to set up and maintain and any employer with one or more employees can be eligible.  For PD IRAs, the contributions are made by employees and are limited to the annual IRA limitation ($5000 for 2012). PD IRAs allow employees to make their IRA contributions through payroll deduction but do not provide the employer with any tax benefits. 

SEPS are funded solely by the employer contributions. The limit is 25% of compensation, limited to $50,000 for 2012. It must be offered to all employees who are at 21 years old and employed for 3 of the last 5 years.  An SEP plan for a self-employed business owner may be an ideal vehicle to defer income.

SIMPLE IRAs include employee contributions and require employer matching. Employees can contribute up to $11,500 (plus $2500 if 50 years old or older) per year. The employer must either match 100% of the first 3% of compensation or 2% of each eligible employee’s compensation. These plans are limited to employers with 100 or fewer employees.  Although the SIMPLE plan can be expensive, it may be an excellent incentive for employees.

Defined Contribution Plans

Safe Harbor 401(k), Automatic Enrollment 401(k), Traditional 401(k) and Profit Sharing are considered defined contribution plans.   All plans are open to any employer with one or more employees and the plans vary in their
complexity.  Generally, the plans must be offered to all employees who are at least 21 years old and worked 1000 hours in the prior year.

For 2012, all 401(k) Plans allow employees to contribute up to $17000 per year and employees 50 years or older can contribute an additional $5500 per year.  The total employer/employee combined contributions is the lesser of 100% of compensation or $50,000.

Safe harbor plans are designed to promote participation among all employees and do not require annual discrimination testing. This is an advantage for highly compensated employees, allowing them to contribute more than they would in a traditional plan. The downside to the employers is that all mandatory employer contributions are 100% vested. 

Automatic enrollment plans enroll all employees unless they opt out of the plan. The contribution rates are set so the plans typically meet discrimination testing. These plans are suited for employers looking for high participation rates.

Traditional plans are subject to annual discrimination testing. Employee contributions are vested immediately but the employer matching contributions typically are vested according to the plan vesting schedule. The vesting encourages employee retention.

Profit sharing plans are funded by discretionary employer contributions. These plans allow employers to make large contributions for employees but the amounts are not pre-determined. 

Defined Benefit Plans

Defined benefit plans are fixed pre-established benefits. Employers are usually required to make the contributions by the plan documents. These plans are available to any employer with one or more employee. These plans are not subject to the limitations of defined contribution plans and many employees value these plans because of a potential for greater benefits at retirement. These plans are more complex and more expensive to establish than other plans.
 
If you are interested in seeing how various retirement plans can assist you in reaching your business and personal financial goals, please contact Gary Bloome, PA.


Gary Bloome PA
9148 Glades Road
Boca Raton, FL 33434
garybloome@garybloomecpa.com
Office:  (561)477-8099
Cell:     (561)302-2373


 
   

 One of the first decisions all new businesses have to make is what entity structure should they have. From sole proprietorships to corporations, each business entity has advantages and disadvantages. The three main types of entities are sole proprietorships, partnerships and corporations. Partnerships can be general partnerships, limited partnerships, limited liability partnerships and limited liability companies. Corporations can either be corporations or S Corporations.

SOLE PROPRIETORSHIP

There are no formal requirements for a sole proprietorship.  It doesn’t require an employer identification number (EIN) unless the entity has employees. The owner can sell the business or its assets as desired, convert to another entity or dissolve at the owner’s whim.

On the negative side, the owner’s personal assets are subject to the entity’s liabilities and legal claims. The entity is limited to one individual.  All income is reported on the individual’s income tax return and is subject to self-employment tax.

PARTNERSHIPS

General partnerships do not require formal formation procedures besides a partnership agreement. The entity should file for an EIN and file a partnership return, allocating income and expenses to the partners.  A general partnership is similar to a sole proprietorship except it involves two or more partners. 

Limited partnerships are similar to general partnerships except one or more of the partners is considered a limited partner and is considered a separate legal entity. Limited partnerships must file a certificate with the
Secretary of State of the state of formation. Limited partners are not liable for the debts and obligations of the partnership as long as they do not become too actively involved in the management of the partnership. 

Limited liability partnerships(LLP) are also separate legal entities.  LLPs must file with the state and although the rules vary by state, usually required insurance to cover the liabilities of the partnership. Also, many states
restrict the entity to professionals, such as attorneys, accountants and other similar disciplines.

Limited liability companies(LLC) are not by definition partnerships but are treated as partnerships for federal tax
purposes.  It is considered a separate legal entity and requires filing at the state level. There are few restrictions on the type of business and the type of entities who can be members. Members have limited liability even though are actively participating in the business.

CORPORATIONS

Corporations are separate legal entities from the shareholders. Generally, the same formalities are required whether the shares of the corporation are trader on the New York Stock Exchange or held by a single shareholder. Management is usually done by a board of directors elected by the shareholders. The organization has an unlimited life and requires a formal election to dissolve the organization. The profits of a corporation are taxed at the entity level and any dividends are also taxed when received by the shareholders.

S Corporations are similar to so called C Corporations except there are restrictions on how many and what type of organizations can be shareholder. Also, the earnings are not taxed at the entity level and all earnings flow to the shareholders for taxation.

If you are interested in forming or changing an entity, please call Gary Bloome PA and we can lead you through the process.