By Amie DeCamillo
Owning and operating a business alone can be challenging, and if you happen to own a business with your spouse or domestic partner, you know there is a whole different set of issues you have to face. In many instances, your business may be the main source of income and retirement funding. That means a lot more is riding on its success than households with separate sources of income. At the same time, the success of your business may depend on how well you maintain your personal relationship. According to one recent study by the Marriott School of Business at Brigham Young University, divorce rates among business-owning couples are higher than for average couples.
First Set the Ground Rules
For people who are business as well as life partners, meeting with your financial advisor is always a good place to start. Consider some of these simple steps as a way to begin a dialogue with your partner about your work life balance.
Separate Business and Personal Finances
It is essential to separate business-related finances from personal ones, including your accounting. No matter what the financial health of the business may be, strive to ensure that your family finances are protected. When launching a business, realize that most start-ups take at least three years to turn a profit. Be sure to amass adequate reserves to pay the mortgage, tuition and any other family costs during slow times. Also, don't forget to pay yourselves a salary.
As mundane as this may sound, many business owners are so busy putting money back into the company that they fail to compensate themselves properly. As spouses owning a company together, this is particularly important since the business may be your family's only income.
Focus on Retirement Strategies
The most overlooked aspect of owning a business is preparing for your own retirement. The lack of a retirement strategy among small business owners is very high. Recent census data shows 63 percent of small business owners don't have a retirement strategy in place. In some ways it's understandable--owners have more immediate issues like generating sales and securing health insurance. However, when spouses are co-owners, achieving the life you want after you stop working can be a challenge.
By working with a financial advisor you can review retirement strategies that not only support your employees but also provide a secure future for you and your spouse. There are a number of retirement strategies business owners can consider.
Anyone can open a traditional Individual Retirement Account, and invest up to $4,000 a year. As the business grows, the next step may be forming a Simplified Employee Pension (SEP) plan. You may be eligible to create an employer-funded SEP plan, which has more generous contribution limits, even when you and your spouse are the only employees. Consult with an accountant and financial advisor to find out actual contribution limits.
Once your business is thriving, forming a defined benefit plan may also offer other advantages. Employers are required to make annual contributions to ensure that the plan will contain sufficient assets to pay the promised retirement benefits to employees when they retire. Constructing the plans require considerable expertise, so consult with a financial advisor and other experts as needed to set up and administer the fund.
Regardless of how you choose to fund your retirement, it's a good idea to make sure you set up a qualified retirement plan, since such plans are protected from creditors.
Finally, give some thought to the fate of the business you've worked so hard to build and what part it may play in your plans for retirement. You can start this process by asking yourself some important questions, such as:
These are all important questions and finding out the answers before you retire can make your transition away from day to day management a lot simpler.
A True Partnership
Your financial advisor can be an essential partner who you and your spouse can turn to in addition to your attorney and tax advisor. Whether it's a financial strategy for your business or retirement planning, regular checkups with your financial advisor can help ensure you meet your overall lifestyle goals while still keeping the company profitable.
Ultimately, by taking these practical steps, you and your spouse will be able to enjoy the benefits of owning your own business, from the flexibility to set your own schedules to being your own boss and working together to build a successful business partnership. Setting the ground rules and looking out for your emotional, as well as financial, health can help both your partnership and your business thrive.
Amie DeCamillo is the Managing Director of the Retirement Group at Merrill Lynch.
Merrill Lynch Financial Advisor Julie A. DeTienne