IARFC – Register, Vol. 14, NO. 1
IARFC Register Contributed Article By: Lloyd Lowe Sr., Owner and Founder – LD Lowe Wealth Advisory; and Rick Robertson, Attorney – KoonsFuller Family Law
One of the fastest-growing new business segments in recent years has been in the area of women-owned enterprises. There are many benefits to launching a woman-owned business, not the least of which is helping your client pursue a dream or take control of her destiny. Wealth managers and financial planners are in a unique position to help women start their businesses on a strong foundation, well positioned for smart growth and well protected from risk.
Benefits of a MWBE Business
According to the U.S.Small Business Administration (www.sba.gov), a woman-owned business must 51 percent owned or controlled by a woman or women. Women- and minority-owned (MWBE) businesses have a distinct advantage when it comes to accessing government contracts at the city, state and federal levels. In addition, in early 2011 the SBA announced the new Women-Owned Small Business (WOSB) Federal Contract Program, which was aimed at expanding opportunities for women-owned businesses to be considered for government contracts.
To qualify for government contracts, a woman-owned business is required to obtain a Dun & Bradstreet (DUNS) number. A DUNS number is also important for any small business looking to establish business credit.
In addition to the government, private organizations across the country have also made an increased commitment in recent years to supplier diversity by hiring more MWBE subcontractors.
When helping a client establish a woman-owned business, it is important to consider that relying solely on a large government contract for income to the business can be risky. For example, KoonsFuller recently handled a divorce case for a woman who owned a business with her husband. A large portion of this company’s income was earned through a government contract that was awarded to the business due to its MWBE status. While the wife owned the business, the daily operation was primarily executed by her husband. When they chose to divorce, ownership of the enterprise was assigned to the husband. When a competitor learned of the arrangement, they were able to successfully win the contract away because it had been awarded on the basis of the business’ woman/minority status.
Getting Started: Begin with the End in Mind
When planning for anyone starting a business, it is important to begin with the end in mind. This may include an exit strategy for your business, but should also cover your personal financial goals through retirement. LD Lowe Wealth Advisory recently worked with a woman looking to set up her own real estate business. To address both her personal and business goals, we recommended incorporating as an S-Corp and setting up payments to herself that would yield tax reduction benefits. We also recommended that she register as a MWBE so she may increase her visibility to and contract opportunities with large relocation companies, as well as open the door to speaking engagements to promote her business.
Should You Use Retirement Funds to Start a Business?
With the recent bad economy and limited bank lending, small businesses have felt the squeeze and entrepreneurs may be tempted to dip into retirement funds to start a business. While it can be done, it is not a good option, as using retirement funds directly to fund a business can result in up to a 45-percent cost in early withdrawal penalties and taxes. A good alternative is to start the business and establish a 401k. Existing retirement funds can then be rolled into the new 401k, at which time the owner can take a loan from the 401k at a low rate of interest while avoiding costly penalties and taxes.
Practical Matters to Protect the Family
Often, the most forgotten risk of starting a new business (women-owned or otherwise) is the risk to the owner’s personal assets through business liability and the personal guarantees which are often required by lending institutions that provide start-up capital. It is therefore very important to consider the right structure for the new business. In general, sole proprietorships are not a good option because of the inherent risk to personal assets. Instead, incorporating as an LLC or S-Corp represents an important step in protecting personal wealth from the risks of the business.
Another consideration involves how to best establish ownership of a business within the family structure. As with the earlier example, events such as divorce, disability or death of a spouse can have a significant impact on the health and long-term viability of the enterprise. Any time a business is owned by one or more parties (i.e., in a corporation or an LLC), it is a good idea to have a buy-sell agreement in place – even if the partners are a married couple. If one of the partners becomes disabled or passes away, the spouse who continues with the business can assume ownership of shares or partnership interest with fewer probate issues.
Protect What You Build
Just as it is important to protect personal assets, it is important to also protect a business from risk. Financial planners play an important role in ensuring their clients have adequate levels of insurance for all aspects of running a business. Insurance considerations for the business should first include errors and omissions insurance, which protects a service business from bearing the full cost of a claim related to negligence on the part of employees of the company. In addition, a business owner who uses loans for start-up capital should consider a form of life insurance.
In terms of health insurance and other related employee benefits, one of the most promising ways to deal with changes in health insurance law is to use a PEO (Professional Employer Organization) to employ staff and provide benefits. The PEO will handle the staffing payroll, worker’s compensation, employee handbooks, legal requirements for staff training, 401k and medical, dental and vision benefits while spreading the costs over a much larger group than just the employees of the business.
Finally, it is important to remember to counsel a woman starting her own business (or anyone starting a business, for that matter) to take care of herself by achieving a good work-life balance. A good concept is to have “free days” that involve no work for a 24-hour period; admin days which serve as preparation time for production days; and production days, which are set aside to meet with clients, bring in sales and assets, etc. Starting a business is certainly personal in many respects, but it’s important not to let business become all that there is.
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This article appeared in IARFC’s Register publication in January 2013. Click here to read the article online.