Although there is a great deal of uncertainty and apprehension in the business community after the Presidential election, every small business could benefit from taking a few planning steps before 2013 begins. Here is our list of steps that we think are essential to every small business as 2012 comes to an end.
Assume That Your Taxes Are Going Up
It is fair to assume that taxes are going up on small business owners. Whether you consider the hidden capital gains taxes in the ObamaCare law or Mr. Obama’s threat to allow the Bush-era tax cuts to expire as a negotiation strategy with House Republicans, it is more likely than not that small businesses will be hit with more taxes. This is particularly true for “tax flow-through” entities such as S-corporations, limited partnerships, LLCs and the like. Those small businesses are essentially individual small business owners operating through a limited liability entity, and they have been favorite tax targets for Mr. Obama. You can expect the White House to raise taxes on this group of entrepreneurs, either through the end of the Bush-era tax cuts or through a new, higher marginal tax rate scheme. Add to these threats the budget troubles in many states and local governments, which have responded to a shrinking tax base by raising taxes on businesses.
Our suggestion is to consult with an experienced small business CPA in November and December to develop a tax strategy for 2013, based on the assumptions we have made here.
Fewer Employees, More Contractors
The Good News-Bad News is that small businesses will be unable to support the higher tax rates, greater level of regulation and governmental red tape, and new mandated healthcare penalties, resulting in fewer small businesses employing workers above fifty (50) workers per company. For these and other reasons, many workers will find themselves unemployed, and many of them will have to start their own small businesses after their unemployment benefits expire. We envision a shift away from hiring employees and increased interest in using independent contractors. For small businesses in need of services that can be outsourced, the cost of hiring contractors, rather than employees, will offer savings that will help increase profitability.
Our suggestion is to consider whether employees can be replaced by contractors, and then to work with your attorney to draft appropriate independent contractor agreements that properly define those contractor relationships in a way that is consistent with state and federal liability and tax laws.
Whether inflation begins to rise in 2013 or 2014, we believe that high inflation rates are now inevitable. The massive federal debt, the unwillingness of Congress and Mr. Obama to cut spending, and the artificial lowering of interest rates by the Federal Reserve, now running for more than four years, has done little to stimulate the economy but has dramatically increased the likelihood of future inflation at historically high rates.
Our suggestion is that business owners consult with their financial advisors and CPAs in order to develop strategies for adjusting business models to the high inflation that should begin in late 2013 or 2014. Simply buying gold or real estate is not a sufficient strategy. Certain products and services will likely be priced out of the market, and any business that is vulnerable to high inflation rates needs to adjust its business model now.
Business Plan Flexibility
Every business should have a business plan that is routinely reviewed and refined. While adherence to the plan is a worthy discipline, the next decade will require businesses to be flexible and willing to make significant changes in its plans. Businesses need to build in the ability to quickly increase or shrink inventory and manpower as markets crash, fade away and emerge. In that regard, contracts need to allow a business to make adjustments while still assuring the business that its vendors and strategic partners can be held accountable. Similarly, business structures need to allow for mergers, consolidation, rapid growth spurts and other dramatic changes. Rigid contracts and business structures will be dangerous or deadly to a company over the next several years.
Today more than ever, business owners need to consult with professional advisors to review and change aspects of the business, its structure, its offerings and its people. While we believe that every small business should consult once each year with the business’ attorney, CPA and insurance agent, we also think that business coaches or advisors, financial planners, industry experts and other professionals should be made important parts of a business management’s team. The benefits substantially outweigh the costs of consulting with such experts on a regular basis and whenever trouble is spotted or anticipated.
Listen To Everyone
One of the greatest traps for any small business is to assume a level of expertise that forecloses the possibility that markets have shifted away or a company’s standards have dropped. The classic example is the family-owned restaurant where all the recipes came from the owner’s mother and no one has dared to renovate or redecorate the restaurant for years. While the owner assumes that all of his patrons love the food and dusty wall decor, someone should have updated the menu and renovated the place years ago. Developing a systematic way to farm data from customers, vendors and employees is critical to the long-term success of any business. Determining when a product or service has become obsolete is now a task that every business faces. Having the ability to spot trends, both good ones and bad ones, is paramount to business success today.