Are you Planning for Retirement? Considerations for Business Professionals
At BPE Law Group, we represent many dentists and other business professionals in managing, growing, and selling their businesses. Today we’ll cover the important question about Retirement Planning. A special thanks goes out to Andy Wass, who is a principal with Nicholas Pension Consultants, for his contributions to this Article. You can find Nicholas Pension Consultants on the web at https://nicholaspension.com/ or contact him by email at email@example.com.
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ARE YOU PLANNING FOR RETIREMENT
By Keith Dunnagan and Andy Wass
Note: This Article was originally written for Dentists but can be equally applicable to other Professions.
After significant schooling and tirelessly building your reputation through attentive and efficient professional services to your patients, you likely have a lingering question: How will I fund retirement? To find a meaningful answer you should start your practice with strategic plans to accomplish your retirement goals. For many practitioners the plan will center around selling your practice and retirement plans like a 401(k), or Defined Benefit Plan.
The choice of whether to operate as a professional corporation, limited liability partnership, or sole proprietor should be considered in light of three questions:
(1) How does the entity type impact your taxes?
(2) How does the entity type impact your liability?
(3) How does the entity type facilitate your future retirement?
The professional corporation allows for an asset or stock sale. The LLP partnership agreement can build in mandatory buyout structures. The sole proprietorship provides the opportunity to easily allocate value to beneficial tax categories. Each has benefits and drawbacks from both operational and practical sale standpoints.
You should periodically review how your business model impacts a future sale. A tradename brands the business and allows patients to associate their dental treatment with the company and not solely with their doctor. When done effectively the tradename carries additional value which can increase the sales price. Another source of value (which will also increase your profits) can be the well-documented practice policies and procedures.
A professional with an imminent transition should pay special attention to their lease. Your practice loses considerable value if your successor is unable to keep the location. Negotiate your lease to allow subleasing, or better yet, an assignment of the lease to a successor. Forward thinking on such a topic saves you time and money during the transition process.
When a practice sale or transition is upcoming, it is important to have a team of professionals to guide you not only in valuation, but also as to the tax and legal implications of sale structures. In an asset sale, individual components of your business (your book of business, goodwill, tradename, and equipment) are independently valued and sold together and may provide you with a larger sale price, but can leave the seller exposed to the practice’s prior liabilities. A stock sale, where the seller transfers all the stock of the corporation, may result in a lower sale price, but may also transfer all practice liabilities with the corporation. The key is to understand the implications of both. Additionally, it may add value and reduce risk for both the seller and buyer if the seller stays at the practice as an employee during the transition.
Once the type of the sale is determined, the parties must agree on a payment structure. For some, a lump sum payment outweighs the tax expense. For others, the ability to spread payments and tax liability over several years is beneficial and worth the risk of non-payment. Others find that a hybrid of these structures provides the best security and financial flexibility desired by the seller. Your financial goals and risk tolerance will determine the best payment structure for you.
Additionally, strategic implementation of qualified retirement plans can minimize taxes and increase savings. A qualified retirement plan is a company sponsored plan that meets the requirements of Internal Revenue Code section 401(a), which generally defers taxes until distribution at retirement age. Any entity type can establish a plan include a professional corporation, limited liability partnership, or sole proprietor. 401(k) Profit Sharing plans and Defined Benefit plans are the most common.
A 401(k) Profit Sharing plan can allow for significant tax savings while providing attractive employee benefits.
Utilizing this plan for long-term savings can alleviate scrambling to save in later years. Individual contributions are capped at $54,000 or $60,000 if age 50 or older (indexed for 2017). Contributions can be made through employee 401(k) salary deferrals up to $18,000 or $24,000 if age 50 or older. Safe Harbor provisions are commonly used in plan designs to ensure owners can maximize their 401(k) deferrals by automatically satisfying certain discrimination tests. Safe Harbor plans typically include a 3% employer contribution or a $1 for $1 employer match up to 4% of income. Additional employer contributions are commonly achieved through discretionary profit sharing, which can be based on age to weight contributions toward owners who are older than the majority of their staff.
Defined Benefit and Cash Balance plans are also age-based and provide higher individual contributions (possibly $250,000+). Generally, the higher the age and compensation, the higher the possible contribution. They can be effective in saving large amounts within shorter periods of time. Coupling these plans with a 401(k) PS Plan can allow owners even higher contributions, while minimizing the required employee cost.
When the time comes for the sale of a business, whether a stock sale or an asset sale, it can be critical to consider the impact on existing qualified retirement plans. It’s important to note that if a seller chooses to terminate the plan prior to any sale, participants automatically become 100% vested upon plan termination. In stock sales, passing a retirement plan to a buyer may be easily accomplished by the seller, but most of the liability rests on the buyer that acquires the plan with any potential compliance issues. In asset sales, the retirement plan typically remains with the seller, but be aware of the partial-plan termination rule under which participants are automatically 100% vested when 20% or more of a workforce is terminated. In cases where sellers are paid ongoing consulting fees, retirement plans can be established to further retirement savings after the sale of a company.
Retirement planning is not just for those over age 60.
It is something every dental professional should think about during their career. Be sure to keep your retirement goals in mind when operating your business because for many, retirement is the tangible evidence of a career well done.
For over 20 years, the attorneys of BPE Law Group, P.C. have been assisting our clients the buying and selling of businesses and providing guidance and representation in the administration and growth of their businesses as well as their estate and succession planning.
If you have questions concerning business, real estate, estate planning or administration, or any other legal matter, give us a call at (916) 966-2260 to schedule a Consultation with one of our experienced attorneys. If you have an immediate question on this topic, please email Keith Dunnagan at email@example.com
This article is not intended to be legal advice, lending advice, or a specific recommendation of any particular lender or company, and should not be taken as such advice.