Benefits for All! Establishing a Business that Pays

Today marks the three-year anniversary of the launch of MY Wealth Planners®, Longmont’s first-and-only fee-only financial planning firm, a title that it maintains to this day. While the path to launching MY Wealth Planners started four and a half years prior as a “supported independence” practice under Waddell & Reed, the launch into full-blown entrepreneurship is both exciting and just a bit terrifying. Even with a loose affiliation to a larger organization, many decisions are taken off of your plate. There are processes and systems, email and server support for tools, present integrations and APIs of various software, and the ever-present hand of colleagues you can lean on. The leap into true independence, whether out of the gate of life or after another career, can be nerve-wracking for even the steeliest of operators. Today, we’re sharing some of the important decisions we had to make going into the practice and the lessons other entrepreneurs and solopreneurs can learn from.

Technology

Right out of the gate, a professional service platform lives and dies by the technology it operates on. While bigger businesses such as a parts manufacturer can only really be established with significant capital and several, if not dozens, of people working on the projects, a professional service business can be started on a laptop. However, even with the modest material means of a professional service, technology is a major decision point. I won’t bore you with the financial planning-specific tools that we adopted, but I will touch on a few major decision points.

• Website: A website is borderline non-negotiable if you want to have a business of even a modest scale. Simply put, for people to want to do business with you, you have to be discoverable. Sans a website (or very robust social media page), the only way people can find you is by referral and introduction. While those are great ways to meet new potential clients, every professional quickly learns that “self-scheduling website clients” feel like pennies from heaven. A website can also serve as the base for your email systems and combine other technology in one place, particularly client-facing technology. If you’re going the free-ish and easy-ish route, popular choices are Square and Wix websites; however, I don’t know many professionals who stick with those platforms for long, as they’re ultimately designed to drive you to use proprietary payment systems and lack full customizability. For purposes of having full control, you’re likely to have to engage a web developer to build a site on WordPress. In my case, I engaged Blank Page Web Development to build and maintain the site, and DreamHost for hosting, which also gives us things like a custom email address (@mywealthplanners.com rather than @gmail.com or something else.)
• Scheduling & Client Relationship Management: Speaking of pennies from heaven on the website, one of the biggest game changers in my practice has been the use of Calendly as a scheduling software. Gone are the days of “2 pm on Tuesday, 3 pm-5 pm on Wednesday, does any of that work for you?” email threads, replaced by simply sharing what is and isn’t available. While some people think that calendar sharing is a power play, ultimately, everyone has to work with or around their existing appointments, and simply letting people pick a time that works for both of you saves everyone a lot of effort. On top of that, putting scheduling on the website is one of the best business development tools available. That said, no amount of scheduling or client contact gets very far without client relationship management (CRM) software. Having one that integrates with your calendar system of choice is ideal since you can use most scheduling software to capture basic client contact information such as name, phone number, and email. Additionally, with the use of software such as Zapier, you can create automation for things like putting the client into your prospect pipeline tracker and add them to marketing reports to help you better understand where clients are coming from.
• Productivity Tools: These are mostly encapsulated into two camps: Microsoft 365 and Google Workspace. There are alternatives, but we don’t speak of them. Fundamentally, what each of them does is largely the same, so a good portion of what you’re interested in them for is their user experience and your comfort level with them. One thing to be extremely cognizant of is what your target client base uses. If you’re a devout Mac user, but almost all of your clients are developers, there’s a good chance that they’re going to be more comfortable with Windows and Linux-based systems over iOS. Another area that comes up here is online meeting software. By market share, Zoom has 73.89% of the world as its clients, with its next-runner-up being Webex at 8.18% and GoTo at 6.83%. There might be some specific or personal reasons you’d use something other than Zoom, but understand that Zoom is statistically the platform that almost three in four of your potential clients will already use or be familiar with.

Business Structure

One of the immediate questions people often ask is “Do I need to do something to start my business?” This question varies state-by-state, but for those of us in Colorado, a simple LLC filing with the Secretary of State for about $50 is all that’s required to get the legal protections of an LLC, though this complicates significantly if you have business partners, investors, or a more formal corporate structure such as an S Corp or C Corp; in those instances, you should absolutely engage an attorney and a competent CPA to make sure you’re set up correctly out of the gate. That said, beyond the legal protections a business entity can provide (separating your personal and private assets), more importantly, it affects your taxes. An entire class can be taught on business entity formation, and the pros and cons of the decisions as to which to use, but to keep things simple, here are a few guidelines:

• If you are a true solopreneur with no employees or anyone else working in the business, a sole proprietorship LLC structure is going to be the easiest and simplest. From a tax perspective, your income will be calculated as revenue – expenses = net income. You will pay 12.4% social security tax on your income up to the annual limit ($137,700 of income in 2022) and 2.9% medicare tax on your income with no limit. You will also pay federal income tax (10%-37%) and state income tax (4.55% in Colorado). A general rule of thumb is that you should set approximately 30%-40% of your net income aside for taxes, and consult with an EA or CPA to make quarterly payments on Federal and State taxes.
• If you are partnering and expect everyone to contribute equally, then a partnership LLC structure will probably suit the partners best. All the rules of the solopreneur description above apply to the partners, except that income and expenses will be divided to their individual tax returns in proportion to their share of ownership in the business.
• If you are partnering and expect uneven contributions of labor, for example that one person is simply investing money in the business while another person will actually work in the business day to day, then an S Corp structure may make the most sense. An S Corp separates payment for work in the business as an employee of the business from owner’s profits. Thus, if one person works in the business from 9-5 while the other does not, the person working in the business can be paid wages for their labor, and also receive a share of the profits of the business that the non-working partner also shares in. In this structure, the owner acting as an employee receives a W2 like any other employee might, and pays half of the social security and medicare taxes while the business pays the other half. Profits of the business paid to the owners (not for their W2 work) are not subject to social security and medicare taxes. However, be cautious with this, as some unscrupulous tax advisors recommend using an S Corp and paying the working owners nothing and taking all income through business distributions. This is tax evasion, and is likely to result in civil and potentially criminal penalties when discovered by an IRS auditor.
• Changing Business Structures: There can be changes in circumstances in which your business structure needs to change. This is fine, but most importantly, the reasons need to be consistent and carry over from year to year. It’s not feasible to jump between different corporate structures each year to influence your taxes and finances favorably. There should be a good and material reason that you would convert the business to a different structure and a valid belief that you will keep the altered structure long term.

Benefits for the Solopreneur

When one transitions from being an employee to an owner, one of the decisions no one makes for you is the adoption of benefits. When you’re a solopreneur, this is relatively straightforward, but some considerations still come into play.

• Health Insurance: As a Solopreneur this is fairly straightforward. You can apply through the healthcare exchange for the health insurance that is a best fit for you, or if you are married and your spouse’s work offers benefits, you may use those. As a self-employed person, health insurance is a business expense that can be deducted pre-tax as an expense, much like it is when you’re a W2 employee.
• Life & Disability Insurance: Life insurance is necessary insofar as you have obligations that may outlive you, such as the needs of a spouse, children, or aging parents. Disability insurance, however, is more often missed by the self-employed, and it can be a huge mistake, given that they have no other financial support if they become ill or injured. In either instance, a self-employed person can purchase life insurance and disability insurance for themselves through a broker. The life insurance is not a deductible business expense in just about any circumstance that could apply to a solopreneur, particularly because the death benefit is tax free. In the case of disability insurance, the question is a bit more nuanced. If the premiums are deducted as an expense for tax purposes, then the benefits will be taxed as income. If the premiums are not deducted as an expense for tax purposes, then the benefits are tax free.
• Retirement Plans: The three best forms of retirement plan for a solopreneur are the Traditional & Roth IRAs, SEP IRA, and Solo 401(k). Both of the traditional and Roth IRA options are simple in that they have nothing to do with your business and effectively cost nothing to open or operate other than any account or fund expenses for the investments used in the IRAs. A SEP IRA is similarly low-cost-low-effort, but is paid for specifically by the business. There is a complex formula for what a self-employed person can contribute to a SEP IRA, but it boils down to just about 20% of the net income of the business up to a limit (and it bears repeating, the number isn’t actually 20%, but it’s approximately 20%.) A Solo 401(k) is a full 401(k) plan in all ways that are beneficial, but because it is restricted only to the owners of a business, it passes all compliance testing and thus does not require a more robust 401(k). This means owners can contribute up to $20,500 as employees ($27,000 for over-age-50 catch-ups) and then provide themselves with additional profit sharing if there are profits to contribute.

Benefits for the Entrepreneur & Their Team

If the business will have employees, at that point we transition to a discussion of benefits for groups, which maintain some slight nuances from solo benefits.

• Health Insurance: A small business can choose whether or not to offer health insurance to its employees until it has 50 or more employees. Many businesses choose to offer health insurance before that point, and do so through either group health insurance or a QSEHRA plan. Group health insurance involves taking a census of all employees and their family members and submitting the census to health insurance companies, which then calculate an “average” employee profile and price insurance policies appropriately. The business can then offer one or several health insurance options, with the addendum that it’s generally customary for the business to pay for some or all of the premiums for their employees, sometimes including employee’s family members. For businesses under 50 employees, the QSEHRA plan is an option, in which the employer simply gives employees a fixed dollar amount (such as $200 per month) to pay for health insurance tax-free, and leaves it up to the employees to select their own health insurance plans.
• Life & Disability Insurance: The tax rules mentioned for Solopreneurs apply here, but there’s an additional nuance. Employers can provide life insurance up to $50,000 to employees tax-free. If employers offer more than $50,000 in life insurance to their employees for free, then a pro-rated income tax is applied to the cost of the premiums greater than the $50,000. On that basis alone, we recommend employers only offer $50,000 in life insurance for free to their employees, and after that make, additional life insurance purchasable at the employee’s discretion.
• Retirement Plans: Most solopreneurs will choose to use one of the three retirement plans mentioned above. Once you hire people, it gets more complicated. While there is no legal requirement to offer a retirement plan to employees, many states, including Colorado, do require that the business auto-enroll employees in a state-based retirement plan if they don’t offer their own retirement plan. Thus, for a business that wants to show a retirement plan as a recruiting and retention tool, it makes sense to adopt a retirement plan. Most small businesses will start with a SIMPLE IRA, which allows employers to match employees at 3% of their wages or contribute 2% for everyone whether employees contribute to the plan. These plans have no significant administrative costs and the matching formula is fairly simple. For larger businesses, a leap into a 401(k) plan with a Safe Harbor is fairly normal. These plans require matching 4% wages if employees put in 5% of their wages, or a 3% automatic contribution whether employees contribute or not. Out of the gate, a 401(k) plan will typically cost approximately $1000 to administer, and can scale up per employee or as the aggregate balance of investments in the plan grows.

A final note for entrepreneurs is payroll software. There are dozens of them out there of incredibly wide quality. Some of the most popular by market share are ADP and Paychex. However, as someone who has worked on both systems both from the employer and employee side, I generally direct people to use Gusto*, which has an incredibly well-designed user experience both on the employer and employee side; and as a financial planner who reads hundreds of pay stubs a year to help clients with their financial planning needs, nothing beats their pay stubs.

*Full Disclosure: The link to Gusto is a referral link. If someone signs up their business for Gusto using that link, they will receive a $200 visa gift card from Gusto and MY Wealth Planners will also receive one. Given that we’re a fee-only firm that cannot accept referral fees or 3rd party compensation, we will gladly give the card given to us back to the business that signs up for Gusto or donate it to charity. Every penny helps when you’re a startup business!