Archive for December 31, 2010

Reduce Capital Gains Tax In The Sale Of A Business

admin / December 31, 2010 / No comments

Hopefully, before selling a business, you meet with a CPA or tax accountant and get an estimate on how much of your proceeds will be going directly to Uncle Sam if you pay them in a lump sum at time of sale. You don’t want to save this surprise for after all is said and done, because not only will it most likely be a shock, but you will have given up your chance to do anything about it.

Planning is everything. For this article I will assume you are not doing a 1031 business exchange, that is selling your business and buying another similar business taking into consideration all the IRS guidelines and timelines. It’s pretty rare to see this, but it can defer all of your capital gains tax if done correctly. A 1031 Exchange is more commonly implemented with real estate.

Depending on how the business is sold, the gains may be taxed as long term capital gain, short term capital gain, ordinary income, etc. and if you are selling an asset in a C-Corp you may face double taxation. So, the idea is to minimize your tax bill and maximize your proceeds no matter what situation you are in.

One option is with a Self Directed Installment Sale. The structure must be in place before the buy/sell agreement is signed. The gist is to receive the sale proceeds in installments and only pay capital gains tax as you receive the income. This has the effect of allowing the majority of money you would have paid immediately in taxes to continue earning compounded interest for you for many years, thus increasing your bottom line by a significant amount.

The details are a bit too complex to fully outline in a short article, but both an LLC and a Trust are created for you and set up meet IRS criteria for favorable taxation of installment sales. Your asset gets transferred to the LLC prior to sale, and your buyer purchases from your LLC. The trust buys the shares of your LLC from you via an installment agreement and you pay taxes on your gain only as you receive the payments.

You, the seller, are able to control when the payments begin and how long they will be spread out. This allows for maximum flexibility to control your income, and plan for future tax savings as well. Since your buyer paid cash in exchange for your property, you are not dependent on them to make the installment payments and you have transferred the risk of refinance or default. This is done by using an independent third party administrator and your money is safely invested in a principle protected insurance product to be used solely for the purpose of paying the installments.

If you pass on before receiving all of the payments due, the remainder of the installment payments pass to the beneficiaries of your choice.

Seeing an example of a taxed sale vs. a Self Directed Installment Sale side by side will show you how much of a difference in overall return this strategy will provide. This can make the process of the sale more palatable and provide a dependable income stream for retirement.

The tax benefit of this approach is similar to your 401K or IRA account. You reduce your current income by the amount of your annual contribution and thus defer the tax you would have paid on that income amount. Those funds are invested in stocks and bonds and grow in value, sometimes dramatically, for the period before you retire and start taking distributions. When you start distributions, the amount is treated as ordinary income and you are taxed at your much lower (you are no longer working and earning a big salary) income tax rate at the time.

The Self Directed Installment Sale allows you to similarly defer your capital gains tax from the sale of your business. Instead of paying all of your capital gains at time of sale, you set up your SDIS to pay out your sale proceeds over time. If you pay all of your capital gains tax at time of sale, that money is gone forever. However, with this vehicle, you spread your receipt of the sales proceeds out over, 15 years for example. When you receive your distribution, you are then taxed for the portion of that distribution that is attributed to the capital gains – generally about 15%.

The difference in after tax proceeds are dramatic and are demonstrated by a complex analysis called an illustration. I will try in an abbreviated fashion, however, to demonstrate the potential impact. If you sold your business and you had a capital gain of $3.46 million, your lump sum capital gains tax payment at a 15% rate would be $519,000. In the SDIS you would keep the entire sale proceeds of $3.46 million and take distributions over a 20 year period or whatever period you chose. You receive an annual payment over 20 years, that would consist of 1/20 of the principal, 1/20 of the capital gains, plus investment returns.

If we did an illustration of this case and compared selling the business and paying all the capital gains up front and invested the remaining proceeds in a 6.85% compound growth portfolio versus the SDIS paying 1/20 of the capital gains annually, you would gain an $831,000 advantage in after tax proceeds. Not to bad for a little advanced planning.

Category: business for sale / Tags: , ,

MonaVie Scam Or A Good Home Business?

admin / December 30, 2010 / No comments

MonaVie began doing business in early 2005. It’s founding officer, Dallin Larsen, states that MonaVie is the fastest growing private company in the world. It apparently does business in at least five different countries A company brochure states that ” MonaVie develops and markets scientifically formulated, premium quality nutritional products, specifically for person-to-person distribution.” It also says that “Our products feature an exclusive blend of the powerful acai berry, found only in remote regions of the Amazon, and other nutrient-dense fruits, each selected for its specific nutritional properties.”

My goal in this article is not to express an opinion in favor ofor to detract from this company, its directors, or nutritional drinks. Instead, my intention is to provide information to potential entrepreneurs who may be interested in a reliable home-based business opportunity as a means to earn money at home.

First, let’s enumerate a few of the benefits when someone decides to work at home:

1. Eliminate the hassle of having a boss telling you things to complete

2. Eliminating a long daily commute

3. Work when you want and where you want

4. Not having the hassle of office politics

5. You get to decide what you wear (robe and slippers work just fine)

6. Tax advantages that accompany owning your business

7. How much you make is determined by how hard and how smart you decide to produce

These advantages accompany any home enterprise, including MonaVie.

MonaVie’s website states: “At MonaVie, our mission is to change and improve lives around the world by introducing unique nutritional products, offering a rewarding business opportunity, and by giving back through our charitable initiatives.” It also asks the following question: “Is it time that you want, or more time? Health, or better health? An income, or a bigger income? Freedom, or greater freedom? Whatever your goals are, MonaVie can help you achieve them.”

Regarding the business opportunity, an article by Tony Dokoupil from the August 11, 2008 Newsweek Magazine reports: “… according to MonaVie’s 2007 income disclosure statement, a federally required printout of their distributor earnings. More than 90 percent were considered “wholesale customers,” whose earnings are mostly discounts on sales to themselves. Fewer than 1 percent qualified for commissions and of those, only 10 percent made more than $100 a week. And the dropout rate, while not disclosed by MonaVie, is around 70 percent according to a top recruiter.” Dropout estimates from other reports approach 90% within the first 90 days.

Let’s look at earnings figures reported by MonaVie for its “active distributors.”

The first line of the official company report states: “The Income Disclosure Statement is a reflection of MonaVie’s rewarding opportunity.”

Analyzing this statement, 97% of active MonaVie distributors receive an average income (before taxes) ranging from $23 per week to $172 per week. This report excludes customers or distributors who have not met sales requirements within any of the preceding 8 weeks to be considered “active.”

Next, lets take a look atthe business opportunity from the standpoint of an independent sales rep. The initial cost to join is approximately $40. Costs to be considered “active” approximate $200 per month It appears that a huge number of people who actively work at their work at home business barely break even or make a small profit. Regardless, many distributors remain enthusiastic fans of the products.

Is the MonaVie business model a pyramid scheme, or a legitimate work at home business? The 97% number given above represents many thousands of individuals who bring in the majority of earnings for MonaVie. These distributors earn very small amounts of money in comparison to the top two to three percent. For instance, in the top category-Royal Black Diamond Executive-seven people each receive from $1.5 million to $3million per year. This disparity in earnings is failry typical in this business model.

The MLM business model–also known as network marketing-has been considered effective for many years. One good feature is the minimal cost to launch the business. Critics feel that the U.S. marketplace is overrun with multilevel marketing people. Thousands of companies exist, pushing lotions, potions, magic juices, weight-loss formulas, food supplements, and more. People who have been rectuited in the past frequently decline invitations to attend sales presentations thinly disguised as “opportunity” meetings. This happenswhen the meetings take place in someone’s home or a rented conference room. Lots of people believe that the MLM business model is dead.

Most people do not like selling. However, this is exactly what’s required to succeed in MonaVie or any form of multilevel marketing. Attempting to recruit and enlist your “warm” market–family members or loyal friends–can strain these treasured relationships. Many find it emotionally tiring that they must continually motivate others; however, this requirement is absolutely essential if your business is to succeed. The hope is that new enrolees will repeat the process and sell their friends, family, and others on both the products as well as the business opportunity.

This method is not unique to MonaVie, but can be found in all businesses that use the multilevel system of marketing. Your income in MLM depends not only upon your personal efforts, but to an even greater extent upon how well you motivate those people to work who are in your downline. Thus, it becomes your responsibility to 1) teach your downline about the products and the business, 2) teach them how to sell, and then 3) keep them up and motivated fairly constantly. I often see estimatesthat from 70% to 90% of all distributors drop out within their first year in multilevel marketing.

In the past two or three years, many home business owners have found greater success by marketing their products or services on the Internet. This more current business model allows substantially more control of one’s income and work requirements. Some refer to the money they earn as “Internet marketing magic.” Your individual efforts in Internet marketing influence your earnings to a much larger degree than with MLM.

Category: home business / Tags: , ,

Small Business Survival Tip: Payroll

admin / December 30, 2010 / No comments

The biggest reality for businesses today is that margins are smaller. Businesses today can’t rely on a ‘captive market’ to continue on earning significant margins. Competition has been blown open, widely open. Not only will businesses have to compete with those in the same area as their businesses are located in, but technology has opened the market even to those businesses outside the area of competition.

Businesses, especially the small ones, really need to get down to basics. Those truisms taught in business schools apply more now than ever before. Think of economies of scale when producing or marketing.  Think of cost-benefit when analyzing options in manufacture. Rationalize resources.

It is one of the hardest thing for a small business to do, this rationalizing resources concept. A small business owner thinks that all the expenses he makes are a step towards expanding the business. But as many large businesses have learned, it sometimes is a matter of what a business does best. Sometimes a business department gets to be so good at what it does that it makes more sense for the parent business to spin off the department into another business that will be a new source of revenue for the parent.

Such is the idea behind business support enterprises. It is necessary for small businesses to have ‘departments’ similar to that of large businesses, so that there is a smoothness to the flow of processes and procedures. Payroll can mean a significant drain on a small business, so it makes more sense to farm it out to a payroll processing service.

Providers of a payroll processing service ensure that a small business would be able to comply with all the nuances of payroll. Payroll has become complex undertaking even for a big business, requiring a lot of manpower, especially those of specialists.

Payroll processing service providers leverage economies of scale, with a number of small businesses as clients, they can attend to all the payroll issues of their clients, since they only need a small portion of their time to use their field of expertise in attending to each client’s specific needs.

Category: small business / Tags: , ,
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