Retirement Basics for Small Business Owners

fortpitt in Retirement Planning 29 May, 2023

Small business owners face unique challenges when saving for retirement. Unlike employees who may have access to 401(k) plans or pension benefits, business owners are responsible for funding their own retirement accounts.

Retirement Strategies for Small Business Owners

Let’s review some small business owner retirement strategies.

How to Retire From a Partnership

Retiring from a partnership as a small business owner can be a complex process, as it involves disentangling yourself from the business and transferring ownership to the remaining partners. The following are a few steps to follow if you are considering retiring from a partnership:

  1. Review the partnership agreement: The first step is to review the agreement to understand the terms and conditions of retiring from the partnership. The partnership agreement will provide guidance on the process for withdrawing and the distribution of your share of the business.
  2. Notify the other partners: Once you have reviewed the partnership agreement and decided to retire, you should notify the other partners of your intentions. Discuss your retirement plans with the other partners and come to an agreement on the terms of your departure.
  3. Valuate the business: The next step is to determine the value of the business, which will determine the value of your share. This valuation process can be complicated, so it is best to work with a professional business appraiser who has experience with small business valuations.
  4. Negotiate the terms of your retirement: Once you have a valuation of the business and have discussed your intentions with the other partners, you should negotiate the terms of your retirement. This should include a discussion of the price of your share of the business and any ongoing liabilities you may be responsible for.
  5. Prepare the documents: Once you have agreed on the terms of your retirement, prepare the necessary legal documents, including a buyout agreement and any amendments to the partnership agreement.
  6. Transfer ownership: The final step is transferring ownership of your business share to the remaining partners. This will involve signing over your ownership rights and receiving payment for your share of the business.


How to Retire From a C Corporation, Sole Proprietorship, or Limited Liability Company

Consider these steps if you are considering retiring from a C Corporation, sole proprietorship, or limited liability company (LLC):

  1. Plan ahead: Retirement planning should begin well in advance to allow sufficient time to create a plan and to make any necessary changes to the company’s structure. Consider consulting with an accountant or financial planner to review your options.
  2. Determine your retirement date: Once you’ve decided to retire, determine the date that you will be stepping down from your role. This will help you and your financial advisors plan your retirement strategy.
  3. Evaluate the company’s finances: Before retiring, review the company’s financial statements and tax records to determine the value of the business and any possible tax implications.
  4. Identify a successor: Identify someone who can take over your role in the business. This may be a family member, another shareholder, or someone from outside the company.
  5. Create a succession plan: Once you’ve identified a successor, create a plan outlining the steps to transfer ownership and control of the business. Consider working with an attorney with experience in succession planning to ensure the plan is legally sound.
  6. Transfer ownership: Once the succession plan is in place, transfer ownership of your shares of the business to the new owner, which may involve selling your shares or gifting them, depending on your individual circumstances.
  7. Plan for your retirement: Once you’ve retired, consider your own retirement planning needs., which may include creating a retirement income plan, updating your estate planning documents, and managing your investments.


How to Sell a Small Business to Retire

Selling a small business can be a complex and time-consuming process, but it can be a great way to retire with a comfortable nest egg. Review these steps for selling your small business to retire:

  1. Prepare your business for sale: Get your business ready for sale by making sure that it is in good financial shape, organized, and has a solid customer base. Make any necessary improvements or repairs to your physical assets, and ensure your financial records are up-to-date and accurate.
  2. Determine your business’s value: You will need to know how much your business is worth before you can put it up for sale. Consult with a business valuation professional, an accountant, or a business broker to help determine the value of your business.
  3. Find a buyer: Identify potential buyers by contacting business brokers, online marketplaces, or industry contacts. You can also consider reaching out to employees or family members who may be interested in taking over the business.
  4. Negotiate the terms of the sale: Once you have identified a potential buyer, negotiate the terms of the sale. This should include the purchase price, payment terms, and any contingencies, such as a noncompete agreement.
  5. Transfer ownership: Once the terms of the sale have been agreed upon, you will need to transfer ownership of the business to the new owner. This may involve transferring ownership of assets and business licenses.
  6. Plan for your retirement: You can create a retirement income plan, update your estate planning documents and manage your investments with the sale proceeds.


Retirement FAQs for Small Business Owners

Review these frequently asked questions to learn how to set yourself up for a comfortable retirement:

How Should a Small Business Owner Save for Retirement?

The following are some ways small business owners can save for retirement:

  • Individual retirement accounts (IRAs): IRAs for small business owners are a type of retirement account that you can set up on your own. Small business owner IRA options include traditional and Roth IRAsTraditional IRAs allow you to defer taxes on contributions and pay taxes when you withdraw the money in retirement. Roth IRAs are funded with after-tax dollars, but withdrawals in retirement are tax-free.
  • Simplified employee pension (SEP) IRA: A SEP IRA retirement plan lets self-employed individuals and small business owners contribute to retirement plans for themselves and any employees. The contribution limits are higher than for traditional and Roth IRAs.
  • Solo 401(k) plan: A Solo 401(k) plan is a retirement plan for self-employed individuals with higher contribution limits than traditional or Roth IRAs. The business owner can contribute both as an employee and employer, making it a popular choice for small business owners.
  • Profit-sharing plans: Profit-sharing plans allow employers to contribute a portion of the company’s profits to employees’ retirement accounts.
  • Simple IRA: A Simple IRA is a retirement plan for small businesses. Employers can make contributions on behalf of their employees, and employees can make contributions through salary deferrals.

What Is the Best Retirement Plan for a Small Business Owner?

The best retirement plan for you as a small business owner depends on various factors, such as the size and type of the business, the number of employees, and your financial goals.

What Happens When a Small Business Owner Retires?

When a small business owner retires, ownership of the business must be transferred or sold to a new owner. The process of transferring ownership depends on its legal structure.

If the business is a sole proprietorship, you can sell or transfer ownership to a family member, friend, or third-party buyer. Alternatively, the business can be liquidated, and the assets sold off to pay off any remaining debts.

You can sell your share of a partnership-based business or LLC to the remaining partners or to a third-party buyer. The partnership agreements should outline the process for transferring ownership.

If the business is a C or S corporation, you can sell your shares of stock to the remaining shareholders or to a third-party buyer if approved by the board of directors and shareholders.

Do Small Business Owners Get Social Security When They Retire?

Yes, small business owners are eligible for Social Security benefits when they retire. Social Security benefits are available to all workers who have paid into the system through payroll taxes. 

The amount of Social Security benefits a small business owner will receive in retirement depends on their earnings history and the number of years they worked and paid into the Social Security system. To qualify for Social Security retirement benefits, a small business owner must have earned a certain number of credits by working and paying Social Security taxes over the course of their career.

Learn About Fort Pitt Capital Group’s Financial Advisory Services

Fort Pitt Capital Group is a financial advisory firm that offers investment management and wealth planning services to individuals, families, and institutions. Learn more about our services and small business owner retirement plans today.

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