MONEY & THE ENTREPRENEUR. Planning your finances when the boss is you

IN 1968, Thomas Stanton was working for someone else; he was an employee at a company that laid down shiny, smooth asphalt blacktop on parking lots, streets, and roads around Minneapolis. But that was also the year he started to work for himself, in his own company. ``I started working part-time in my own business,'' he says. ``By 1970, I was on my own full-time,'' as owner of Ace Blacktop Inc., in Inver Grove Heights, near St. Paul, Minn. In the years leading up to 1970 and immediately after, Mr. Stanton didn't have much time to think about his own family's finances, things like saving for his children's college, putting something aside for retirement, or making sure he was adequately insured.

``I guess I paid very little attention to it all until my oldest child was in third or fourth grade,'' he recalls. ``My wife was a teacher and she considers education very important.''

But without his wife's impetus, Stanton admits, he might not have even done that much planning. Meeting the financial needs of the business - buying equipment, obtaining loans, meeting payroll, paying taxes, and landing new business - took most of his mental and physical energy.

In recent years, he has taken the time to develop a retirement plan, maintain a college savings plan for his three children, and find life, health, and disability insurance coverage.

Unlike many entrepreneurs, Stanton has an off-season to find out what he needs to know. ``This is a seasonal business,'' he says. ``I've had time during the winter. I talked to people. I became educated. I went to school on a lot of people,'' including brokers, accountants, and financial planners.

Most self-employed people, however, don't have an off-season to do research, read, and ask questions. Many don't have an off-weekend; especially in the first few years, the business is a seven-day-a-week, 14- to 18-hour-a-day undertaking.

But while entrepreneurs often have the least amount of time to spend on their personal finances, they also have the greatest need. Without the protective umbrella of corporate insurance and retirement benefits, and without the anticipation of a steady - and steadily rising - income from one year to the next, self-employed people have to ``create'' these benefits themselves, from their own income or from the income of the business.

``When people are working 75 hours a week and they know they are going to be doing it awhile, they put things in order,'' says Ray Greene, a financial planner in Needham, Mass. ``On a scale of 1 to 10, now is a priority 11.''

For these people, Mr. Greene says, taking care of today's business and family needs not only takes up all their time, it takes up most of their spare cash, too.

``Most entrepreneurs are of a type,'' says Steven Enright, a planner with Seidman Financial Services, a division of Seidman & Seidman, the accounting firm. ``They are entrepreneurs from an early age and are used to starting a business on a shoestring. With everything else, the last thing they need is the additional expense of a financial planner.

``When they're investing, they tend to be fairly conservative because they want to preserve their capital.''

While the best course would be for an entrepreneur to visit a financial planner or accountant before striking out on his or her own, most don't. Often, an idea leads to a business plan, which leads to financing, which leads to starting the busines. Personal planning is either overlooked or put off until later.

Personal and business interests blend

``When we started, we were both about 28 years old,'' recalls Marcia Sharp. In the early 1970s, Ms. Sharp and Susan Hager started a public relations firm in Washington. ``We weren't even clear if we were going to be in this business for the long pull.

``It was several years before we began to think about our own long-term futures. We tended to blend our personal interest into the corporation's interest.''

Like many self-employed people, both Ms. Sharp and Ms. Hager had husbands who worked for companies that provided the most costly benefit, family health insurance. That covers one of the important areas all self-employed people should deal with immediately. The others are life and disability insurance, and getting the services of an accountant.

``We had a CPA from Day 1,'' Sharp recalls. Even then, their beginning was not without mistakes. ``We made one modest mistake,'' she says. ``We started out legally as a partnership. In several months it became apparent the partnership was making money we never saw, but we had to pay taxes on it.'' The pair would have been better off as a corporation, she says.

Staying afloat in tough times

Another person who suddenly found herself in the world of the self-employed was Ruthann Fairbairn, an accountant in Oklahoma City. In the 23 years she has been on her own, she has seen two sons grow up and go through college; gotten divorced; and tried to help her clients and herself through the painful economic effects of lower oil prices on Oklahoma's economy.

``A year ago, there were seven of us in this office,'' she says. ``Now there are four.''

But when she was starting out, Ms. Fairbairn admits, her own financial planning often had to be postponed.

``Many times, my family was the last to get planning,'' she says.

In those early years, she, too, had a husband who was receiving most of the necessary insurance benefits from an employer. But after the divorce, things changed dramatically. ``We had to do some very quick planning to meet college bills,'' she says. ``There was some money in the bank which we targeted for college and we added to it.''

Saving for college is harder now both for people who work for companies and the self-employed, notes David Parsons, a partner with Oppenheim Appel Dixon & Co., a New York accounting firm.

``The new tax law says any income over $1,000 is taxed at the parent's rate until the child is 14,'' Mr. Parsons says. This makes many saving schemes, like Uniform Gift to Minors Act accounts and Clifford Trusts, either useless or much less effective.

While some tax-free savings vehicles, like municipal bonds or single-premium whole life insurance, are available to both salaried workers and the self-employed, there are some tactics that only the self-employed can use, Parsons says.

One that is particularly good if the child is over 14 is a sale-leaseback arrangement. A parent gives a fully depreciated piece of equipment or furniture to the child and leases it back from him or her. The lease payments go into the college fund and - if the child is over 14 - are taxed at the presumably lower rate.

``A dentist could depreciate his dentist chair and lease it back from the kid,'' he explains.

Putting kids to work for college fund

Many entrepreneurs, of course, put their children to work for them. As long as the child is working for the parent, child-labor laws do not apply. The pay has to reasonable, though; your business can't pay Junior $100 an hour to sweep floors when $5 is the most you might pay to a non-relative.

Parsons has also worked with clients who gave parcels of land to a child who then leased it back to the company. Then a house or other structure was built on the land and rented out. Because the child's income is under $150,000, the rental income can be offset with the deductible expenses of maintaining the property.

``There are some very creative ways of handling college expenses'' that are available to the self-employed, he concludes.

Another area where the affairs of the business and one's personal finances are apt to conflict is in debt.

``Debt management is a tremendous obstacle,'' Parsons says. ``People have to meet bills as they come due, negotiate loan terms, meet balloon payments.

``I know folks who have financed their business on credit cards,'' he says, though no one did that on his advice.

``I get a little nervous when I see a client who wants to finance his house to the nth degree and put all their money in the business. I say never fly into a blind canyon. Never get into more debt than you can get out of by liquidating the business.''

The banks aren't much help in this regard, he says. ``We used to be able to depend on the banks to help determine who was overextended. We can't anymore.'' This means entrepreneurs, who tend to be more comfortable about risk to begin with, have to use some caution on their own to finad a manageable debt limit.

Adequate insurance coverage a must

While debt is often one possible stumbling block for people starting their own businesses, insurance is another. Most planners say that even if noting else is taken care of - be it retirement, saving for college, or building up a nest egg - no one should head into entrepreneurship without adequate life, medical, and disability insurance.

People with company benefits usually have group life insurance equal to two or three times their annual salary, have most or all of their medical insurance premiums paid, and can often get up to several months off with full or partial pay if they are disabled.

Self-employed people, on the other hand, have to find their own life insurance (usually term, because it offers the most protection for the least amount of money), pay from $250 to $350 a month for medical insurance, and - since they can't give themselves several months off with pay and no work - pay $1,000 or more for disability insurance.

While many companies offer disability insurance, Mr. Greene says, care must be taken to find one with a fair definition of disability, and a good record of making timely payments. Some companies, he says, say a disabled worker must be unable to perform ``each and every duty of their regular occupation.'' He prefers a company whose contract simply says a person is unable to perform their duties.

Among the companies he recommends as having the best prices and fairest reputations for paying claims are Provident Life & Assurance, UNUM Corporation (formerly Union Mutual), Paul Revere, New England Life, Massachusetts Mutual, John Hancock, and Northwestern Mutual Life.

Some insurance expenses can be eased a bit, however. Many self-employed people are able to join local chambers of commerce or professional organizations that can obtain group rates in various insurance products. You won't get free medical insurance, but you might be able to get family coverage for $200 a month instead of $350.

``Entrepreneurs are willing to take great risks with themselves,'' Seidman's Mr. Enright says. ``They're willing to bet on themselves. They want to add these defense mechanisms to protect their families.''

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