Becoming Successful Takes Hard Work—Staying Successful Takes Planning

It used to be if you had a good product and provided solid customer service, you could count on success. While product and service are still critical, other variables—such as increased competition for key employees—can make maintaining and building on that success difficult.

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    Consider your own business. Your success didn’t happen overnight. It took careful planning, attention to detail and a lot of hard work. And if your business is like most, the contributions of a few key employees is responsible for your business’s success. That’s part of the reason why more business owners are looking for creative ways to reward and retain their key people. Unfortunately, government regulations can make it difficult for businesses to reward one select group of people without doing the same for everyone.

    So, how do you build on your success and reward the people who’ve worked hard, year after year, to make that success happen? One answer might be the use of a welfare benefit plan designed to help small business owners provide themselves and select key employees with substantial life insurance protection, medical benefits, or other optional benefits.

    Why life insurance? It’s one of the most remarkable financial tools ever developed. Life insurance proceeds can be used to:

    • Help families maintain their lifestyle and pursue their objectives following the loss of a major breadwinner.

    • Fund the purchase of a co-owner’s share of the business following her or his pre-mature death.

    • Pay estate taxes and other expenses, allowing personal and business assets to pass to an individual’s named beneficiary intact.

    How can a 419 plan help business owners?

    Generally referred to as a “Section 419 Plan” after section 419 of the Internal Revenue Code, the plan is available to owners of C corporations, sub-chapter S corporations, and limited liability corporations, but not sole proprietors. It allows for the purchase of life insurance on owners and selected key employees using company dollars.

    The benefits to business owners include:

    • Plan contributions (policy premiums) for participants are considered a tax-deductible business expense.

    • Policy cash values grow free from current income taxes.

    • You can provide yourself and key employees with substantial life insurance benefits that, with proper planning, can pass to named beneficiaries income tax free and possibly estate tax free.

    • You can limit participation in the plan to just owners of the business and/or select employees.

    • You can accommodate your company’s cash flow needs by choosing from a variety of flexible funding alternatives. Typically, universal life policies are used because of their premium flexibility.

    • All plan assets are sheltered from the claims of creditors, whether business or personal.

    • Your plan can be integrated into any existing business continuation and estate plans, buy/sell agreements, and/or personal estate plans you or your employees may already have established. 

    • The only “cost” to plan participants is the income tax due on a small portion of plan contributions equal to the “economic benefit” of the life insurance protection. Some employers choose to provide employees with a “bonus” equal to this amount of the tax.

    The bottom line

    You and your key employees are likely the backbone of your past, and current, success. By protecting them, yourself and your business with life insurance, you can help ensure your company’s future success as well.

    This information is provided for educational purposes only and should not be construed as tax advice applicable to each individual. Please consult a qualified tax advisor regarding your individual circumstances. All guarantees are based on the claims paying ability of the issuer.

    Joseph Pilla is VP – Advanced Strategies at 21st Century Financial. Contact him via email at jpilla@xxiadvisors.com or via phone at 216-545-1781.


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    Next up: COSE Member Capital Advisors, Ltd. Awarded 2016 Best Practices Award by InvestmentNews
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  • COSE Member Capital Advisors, Ltd. Awarded 2016 Best Practices Award by InvestmentNews

    InvestmentNews named COSE member Capital Advisors, Ltd.  as one of 12 winners of the 2016 Best Practices Awards, an important initiative that recognizes the top-performing and most innovative firms in the financial advice industry.  The 12 winners of the InvestmentNews Best Practices Awards were identified through their participation in the 2016 Financial Performance Study of Advisory Firms, and recognized at The Best Practices Award and Workshop at the New York Athletic Club in New York City, on October 18th. 

    InvestmentNews named COSE member Capital Advisors, Ltd.  as one of 12 winners of the 2016 Best Practices Awards, an important initiative that recognizes the top-performing and most innovative firms in the financial advice industry.  The 12 winners of the InvestmentNews Best Practices Awards were identified through their participation in the 2016 Financial Performance Study of Advisory Firms, and recognized at The Best Practices Award and Workshop at the New York Athletic Club in New York City, on October 18th.

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    To identify the 2016 Best Practices Award winners, InvestmentNews Research created composite scores that examined the rate of growth, profitability and productivity levels for all the participants in the 2016 InvestmentNews Financial Performance Study. The firms classified as having “Best Practices” were those who ranked among the top-quartile of all participants; however, a number were selected for extensive qualitative interviews conducted by the InvestmentNews Best Practices Committee, in order to select the 12 winners.

    “We are honored to be considered amongst some of the finest wealth management firms in the country,” says Neil Waxman, Managing Director, Capital Advisors, Ltd.  “To my mind, recognition of best practice is some of the highest praise we can attain because it confirms what our team works so diligently to achieve: commitment to excellence, prudence, and consistency in bringing to bear a superior level of service to our clients.”

    This is the fourth consecutive year that InvestmentNews has recognized the industry’s top-performing firms as part of the Best Practices program. All of the firms honored have participated in InvestmentNews’ primary benchmarking studies: The Advisers Compensation & Staffing Study, The Financial Performance Study of Advisory Firms and The Adviser Technology Study.

    “The firms that have seen the most growth are those that have been the most strategically managed,” says Mark Bruno, Associate Publisher of InvestmentNews. “Capital Advisors is one of those firms, and its leaders executed on their strategic plans more effectively than most firms in the industry. They are an excellent example of how—and why—professionally run wealth management firms are out-performing and well-positioned for long-term success.”

    InvestmentNews honors Capital Advisors, Ltd. with a 2016 Best Practices Award. 

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    Next up: Deferred Compensation—Understanding the Options
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  • Deferred Compensation—Understanding the Options

    As American business enters the 21st century, old methods of doing business are quickly being replaced with the new – new technologies, new approaches, and new ideas about attracting, rewarding, and motivating high quality employees. Nowhere is this more evident than in the matter of key employee and business owner compensation, and specifically in the area of Deferred Compensation Planning.

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    A Deferred Compensation Plan (DC Plan) is exactly what its name implies – it’s a plan that allows an individual to defer a portion of his or her current income, and the taxes due on that income, until a future point in time – usually retirement.

    Because it is a non-qualified plan, employers may select whomever they want to participate from their executive or management team. There are no contribution limits and no significant filing or reporting requirements. On the negative side, contributions are not tax deductible until benefits are paid out to participants and, under the doctrine of constructive receipt, benefits may be taxable to participants when they have the right to receive them – not necessarily when they are actually paid. (Establishing a vesting schedule can help address this issue) 

    DC Plans come in many shapes and sizes. They can be Defined Contribution or Defined Benefit; Salary Reduction or Salary Continuation Plans; and they can be structured to provide disability and life insurance benefits. Choosing the right plan arrangement depends upon a company’s specific goals (e.g. retaining key employees) and upon the goals of the selected participants (e.g. supplemental retirement income, current tax reduction).

    To help you get a better understanding of the variety and flexibility of the DC Plans, let’s briefly consider each of the above structures:

    Salary Reduction or Salary Continuation?

    DC Plans generally fall into one of two categories – “Salary Reduction” or “Salary Continuation.” Under a Salary Reduction Plan, participants agree to defer a portion of their current salary (or bonus) to a future point in time – usually retirement – allowing them to postpone paying taxes on that income until they are likely to be in a lower tax bracket.

    Under a Salary Continuation Plan, the employer agrees to provide participants with additional compensation over and above their regular salary, but it defers payment of that additional compensation until a later date – in most cases retirement. Salary Continuation Plans are often called Supplemental Executive Retirement Plans (SERPs). 

    Defined Contribution or Defined Benefit?

    When an employer chooses a salary continuation plan, another consideration is whether the plan should be a Defined Contribution Plan, where the amount contributed each year on behalf of participants is established (“defined”) under the plan agreement, or a Defined Benefit Plan, which specifies the amount each participant will collect at retirement. Under a Defined Contribution Plan, retirement benefits could vary depending upon the performance of the plan’s underlying funding vehicle(s). Under a Defined Benefit Plan, the amount payable at retirement is guaranteed under the agreement, but annual contributions may vary – making it difficult for an employer to work plan contributions into its annual budget. Again, this potential variation is governed largely by how the plan is funded.

    Contributions to certain DC Plans can be made by both the employer and the covered participants. In such cases, contributions by participants are generally “matched” by the employer in much the same way as a traditional 401(k) Plan. These kinds of DC Plans are often referred to as 401(k) Overlay or 401(k) Mirror Plans, and they can be used in conjunction with, or in place of, a traditional 401(k) Plan. When used in conjunction with a 401(k), these types of plans can help “equalize” retirement benefits for highly compensated key employees who, because of government regulated funding limitations, would otherwise receive a lower percentage of wages at retirement than their lower paid counterparts.

    Once the determination has been made as to which type of DC Plan will best meet the needs and objectives of the employer and participants – defined contribution, defined benefit, salary reduction, or salary continuation – the big question becomes how to fund it.

    Funding alternatives

    As one might expect, there are numerous funding alternatives. Some employers choose simply to pay the agreed upon benefits out of company cash flow and hope that their cash flow will be adequate when benefits come due. (Of course, whether such an un-funded plan would be enough to motivate and retain a much-needed key employee is certainly open to debate!) Other employers use securities such as stocks, bonds, and other investment options to finance their plan. Unfortunately, unforeseeable market fluctuations can leave these types of plans seriously underfunded just when benefit payments are scheduled to begin. Another disadvantage to this method is that investment gains are taxable when realized, which can further burden an employer’s bottom line.

    To address these issues, many employers turn to Company Owned Life Insurance (COLI) to fund their DC Plans. Under a COLI arrangement, the employer purchases a cash value life insurance policy on each participant, and is the owner, premium payer, and beneficiary of each of the policies. Salary deferrals (contributions) and/or company contributions are used to pay the premiums on the policies. Policy cash values grow income tax-deferred and, at retirement, can be accessed via loans or withdrawals to pay plan benefits.    Withdrawals and outstanding loans will reduce the policy’s cash value and death benefit.  However, if a participant dies prior to retirement, the plan can provide for a death benefit to be paid to his or her beneficiary, essentially self-completing the plan. As well, policy riders can be added to provide disability benefits should the plan include disability as one of the benefit triggers.  It is this flexibility that makes COLI such a popular funding method. 

    But the benefits of funding a DC Plan with COLI don’t end there. Using life insurance as a funding vehicle can allow an employer to recover the cost of the plan – either in part or in full – through the receipt of death proceeds, and contractually guaranteed cash values can ensure that the funds required to pay plan benefits will be there when they are needed. Under a COLI arrangement, the employer can change who is insured under the COLI contracts; it can pay benefits from either policy death benefits or policy cash values; premium, interest, and expense guarantees allow the employer to develop a long-term financing plan; and buying as a “group” often allows for favorable underwriting considerations. This can be especially helpful if an owner or key employee has health or medical issues that might otherwise make purchasing life insurance costly or difficult. All guarantees are based upon the claims-paying ability of the issuer.

    How do Deferred Compensation Plans work?

    There are essentially four steps to establishing a DC Plan. The first step is choosing the employees (participants) who will be included in the plan, the benefits which will be paid out under the plan (retirement income, disability income, death benefits, etc.), and the “triggers” (termination of employment, retirement, disability, death, etc.) which will initiate the payment of benefits. Step two is deciding where the salary deferrals will come from – will they be taken from current salary (Salary Reduction) or paid in addition to current salary, but deferred until a later date (Salary Continuation)? Step three is the selection of a funding vehicle – and if life insurance, the purchase of a cash value life insurance policy on each participant. Step four is the payment of benefits following a “trigger” event – usually retirement, disability, or death. 

    DC Plan benefit payments become a tax deduction to the employer and are taxed as ordinary income to the participant (or his or her beneficiary). If properly structured, at the participant’s death, a portion of the life insurance proceeds can be used to reimburse the employer for premiums and/or benefits paid. It’s that simple.

    Could a DC Plan be right for you?

    If you’re looking for ways to reduce current income taxes and supplement future retirement income – or if you’re looking for a way to attract, motivate, and retain high quality employees – then a Deferred Compensation Plan may be just what you need to meet your personal, business, retirement, and tax reduction goals. Ask your financial advisor for more information.

    The content was prepared by The Penn Mutual Life Insurance Company and is intended to offer a general understanding of Deferred Compensation strategies.  Actual strategies may vary based on the products and benefits chosen, the issuer and state.  Any reference to the taxation of insurance products is based on Penn Mutual’s understanding of current tax laws. Clients should consult a qualified advisor regarding their personal situation.

    Joseph Pilla is V.P. Advanced Strategies & Business Advisory Services for XXI 21st Century Financial 216-545-1781. Custom designed strategies for both individual & businesses through uses of; Business Valuations, Premium Financing, Business Succession/ Asset Protection/ Insurance/ Wealth Transfer/ Investment/ & Retirement Planning.

    © 2018 The Penn Mutual Life Insurance Company, Philadelphia, PA 19172

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    Next up: How to Build Your Business's Financial Gameplan
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  • How to Build Your Business's Financial Gameplan

    With all of the day-to-day business operations entrepreneurs are faced with—product development, human resources issues, and business development to name just a few—it might be easy to lose track of a business’s balance sheet strategy.

    With all of the day-to-day business operations entrepreneurs are faced with—product development, human resources issues, and business development to name just a few—it might be easy to lose track of a business’s balance sheet strategy.

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    “A lot of small business owners don’t understand their business’s costs,” says Brian Alquist, president of business consultancy 1Direction, Inc., in Brecksville. “Consequently, they’re really just focused in on the cash they have at the end of the month.”

    But operating a business requires a much more comprehensive plan than just focusing on what’s left over when the month comes to a close, experts say. It requires detailed thought around the best way to think about setting financial goals and KPIs, access to capital, accounting best practices and more.

    ‘Build backwards’

    One of the first things an owner needs to do is settle on what the organization’s goals are, says Michael Foss of Foss Business Solutions in Lyndhurst.

    “Build backwards,” he advises. “What are our current expenses? How do I want to grow? What do I need to do to achieve that?” Once those questions are answered, the business owner will begin to be able to form a clear picture of the sales (and gross profit margin) the business needs to obtain to achieve those goals.

    This is where understanding your cash flow comes in, says Rion Safier of Rion Safier Accounting LLC in Beachwood. For a small business, cash flow is king and the company’s budget and cash flow forecast

    “There are companies that don’t have an accounting infrastructure and the business owner is just flying by the seat of their pants and using their bank balance as one of their key drivers,” he says. “That’s not a good way of looking at it. What if your receivables are delayed? Your cash might be depleted. Only looking at the cash balance is not an indicator of the health of a company.”

    Measure effectively

    What businesses should be paying attention to is working capital, or the capital a business uses in its day-to-day operations and calculated as current assets minus current liabilities, Alquist says.

    “That tells me how well they’re really managing the financial aspect of their business on a day-to-day basis,” he says. “If the company has some level of capital invested in the business, I would also look at the ratio of depreciation to expenses. That tells me if they are investing or reinvesting in the business.”

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  • Is it time to look for a CFO for your business?


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    Next up: Low-Rate Lending Options for Small Businesses
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  • Low-Rate Lending Options for Small Businesses

    Microloans and the Community Advantage Program are two ways you can potentially save on interest payments.

    You got through the holidays and made it back to your business.  Congratulations!  Now it’s time to give your business a gift by lowering your interest rates. The coldest months are a good time to hunker down and analyze how to squeeze more profitability out of your income statement. Reducing interest expense is probably the least painful way to do so.

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    According to a study by the U.S. Small Business Administration Office of Advocacy, only 12% of businesses use a business loan for capital when they are starting out. Business and personal credit cards account for almost twice as much of entrepreneurs’ starting capital.  That’s a little surprising because most savvy business owners are aware that carrying balances on credit cards results in interest rates well over 16% these days, according to bankrate.com. Some “fintech” solutions may have effective interest rates that are even higher. The fintech industry includes names like OnDeck and Kabbage.

    Credit cards and fintech loans are easy and fast, and entrepreneurs love that combination. For many entrepreneurs, ease and speed are worth the extra expense, until they start adding up the cost. 

    Here are some options that might work for you.

    Microloans

    The SBA offers microloans to borrowers who, for whatever reason, cannot qualify for regular bank financing. When an entrepreneur gets started by running up credit card balances, it may adversely affect the personal credit score of the owner, a double hit because it locks out the entrepreneur from many typical routes of refinancing.  Enter the microloan.

    “Taking out too many credit cards will reduce personal credit scores and make it even more difficult for a traditional lender to offer a loan,” says Patty Ajdukiewicz, relationship manager for the Economic and Community Development Institute.

    The Economic and Community Development Institute (ECDI) provides SBA microloans to qualified individuals who can meet certain basic eligibility requirements and show repayment ability. Microloan rates range from 9% to 12%. That is more expensive than a traditional bank loan, but a fraction of the costs of credit cards and fintech.

    Ajdukiewicz notes entrepreneurs should anticipate having to pledge all available collateral when they refinance a credit card loan. While a credit card may leave fixed assets unencumbered, the lender is compensated for that lack of collateral with a high rate. An ECDI Microloan could cut the interest rate in half, but you should anticipate a lien against your business assets, and perhaps personal assets as well.

    Community advantage

    For slightly larger transactions, Growth Capital Corporation’s Community Advantage program is also available.

    “I’ve got one now that we’re approving today. They’re 13 years old and have revenues of $1.3 million.  They have over $100,000 in credit card debt. Thirteen years and they have never gotten good advice,” says Kate Kerr, program director.  She adds that most of the clients she works with have one or two credit cards, perhaps to take advantage of refund points or free travel. But some companies might end up with dozens of cards, and the debt load quickly becomes unmanageable. 

    A key difference between responsible term loans and credit card debt is the ease with which the transaction is completed. Credit cards are the easy path, but you pay for the convenience. Expect a much higher degree of due diligence from a lender like Kerr. The rate is much lower, but you must have your financial statements in order. 

    For example, businesses need to have their tax returns filed so that the loan can be underwritten, Kerr says. Your accountant may have the ability to get you an extension on your taxes, but if you’re in the process of applying for a loan, that is actually not at all helpful.  SBA-backed loans such as Community Advantage or microloan typically need financial statements current within 120 days of application.

    You can also refinance high-rate loans through most traditional banks. SBA’s loan guarantee programs are available to assist any participating lender, if there is not sufficient capital or time in business to justify a conventional loan. 

    If you must use fast credit, use the business name

    When the outstanding debt is in the name of the business, it is easier for a bank to refinance the higher rate debt. SBA only asks that the bank obtain the applicant’s certification that the debt incurred was exclusively for business purposes.  If the balance includes personal expenses as well, these amounts must be excluded.

    When the outstanding debt is in the name of the individual owner, it is much more difficult. Lenders must document the specific business purpose of the credit card debt and the applicant must certify that the loan proceeds are being used only to refinance business expenses. Documentation required will include a copy of the credit card statements and individual receipts of any expenses in excess of $250.

    If you must start your business on a credit card, at least try to get a card that is in the business name.  That will make a future refinance request much easier for the lender to process.

    Ray Graves works in lender relations in the SBA’s Cleveland office.

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