Are you a baby boomer that has considered starting your own business? Maybe you have the aspirations of being the Harland Sanders who took his $105 social security check and a family chicken recipe and launched a little restaurant chain known as Kentucky Fried Chicken. Ever heard of it? The “Colonel” was unique in his time, but in today’s world; baby boomers becoming business owners is becoming more the norm.
The Need For More After Retirement
In a survey done by AARP, 80% of baby boomers want to work in retirement at least part time. In addition, many of those intend to go into business for themselves. But what’s the motivating factor?
Some retiring boomers view entrepreneurship as a means to fuel their desire for mental stimulation, physical activity or social interaction. Others see it as more of a necessity. They need the income to continue to pay for living expenses in addition to the rising cost of health care. Regardless of the motive, these boomers turned business owner newbies need direction and solid advice.
Advanced Planning Is Key
Many people get the “owning your own business” itch and jump in too soon. Somebody has to sit back and play devil’s advocate and make sure the dream is not just a dream and can be a reality.
Boomers need to make sure that that the financial house is tidy before they embark on their own. Especially, those that opt for early retirement. A couple things to consider:
- Are you fully vested in your company’s retirement plan?
- Have you reached your maximum social security earning potential?
By jumping ship to early, you might be cashing in too soon and miss the opportunity to have a stable cash flow while your trying to get your new business off the ground.
Need Some Capital
With all the recent failures on Wall Street, it’s a well known fact that without capital, you’re good as gone (unless you get a bailout, of course). Being proactive by building up liquidity and having personal funds to nurture the business are preferred. But many are forced to dig in their own pockets to fund their new baby.
If you decided to tap your investments, tax issues can arise. Especially if they are retirement funds. IRS rule 72t allows boomer to tap their retirement nest egg, but with numerous stipulations.
Franchises Are Enticing
Franchise operators in particular are enticing boomers to become business owners by encouraging them to utilize tax code sections from The Employee Retirement Income Security Act of 1974, which enables individuals to redirect their retirement savings into a retirement plan that invests directly into the new business-without having to pay taxes or incur any penalties. The new business owner can then use the funds for start up expenses including equipment and paying salaries.
Be Tax and Law Conscious
Incorporating an accountant and lawyer is almost a necessity when starting a business. Incorporating or forming an LLC to protect the individual owner’s assets is key. You need to understand the ramifications if the business fails, what happens to your personal belongings.
Individuals need to be diligent to maintain independent contractor status in the eyes of the IRS or risk being re-classified as an employee, which could create additional tax burdens. To ensure this, make sure you register your business name, obtain the necessary licenses and permits, establish a separate bank account, purchase business insurance, and demonstrate recurring business expenses such as rent or equipment.