Salary Deferral for Small Business employee/shareholders?

[Guest mark]

I would like to learn more about salary deferral options for the small business owner/employee. I have a key employee who shares in 25% of the profits of the business. I would like to encourage him to stay until retirement. I would also like to sell him 25% of the stock at a discount. My goal is to provide this employee with a large lump sum upon his retirement. Also, is there any way I can provide this benefit for myself as well?

Anyone who has any insight or knows of any publications or resources which might help me achieve these objectives, please e-mail at markabood@netscape.net. Thank you in advance for you time.

[Guest BobParks]

In order to give even a horse back response, certain info is needed.

Are you a SP or Inc? You said sell him 25% of stock but sometimes that term is used loosely.

Anyone buying a minority interest in a closely held business is going to discount the offering price for a lack of marketability factor and a lack of control. An arms length pricing between non-related

parties can be just about anything you want.

So chain discounting just the two factors above might generate a 30 to 40 percent discount.

If you put part of the Profits into a Profit Sharing plan the lump sum at retirement is an automatic. Owners and employees can both participate regardless of business type.

Deferred compensation for the shareholders to be effective, generally has to be done thru a qualified pension/profit sharing type of arrangment.

I'll bet some of the other readers will have some additional thoughts. Everything from qualified plans to severance trust plans to equity split dollar might deserve a review.

[Lorraine Dorsa]

Depending on the ages of the parties involved (works if the owner is older and the employee/new owner is younger) is to set up a defined benefit plan and consider some/all of the benefits accrued in the DB plan for the older owner in the buy/sell. This way, the larger contribution to the older owner over his remaining years (tax deductible to business and tax deferred to owner as individual), which increase the $ the older owner takes out of the business and presumably reduce the profitability (and therefore maybe value of stock)which will be purchased by the employee/new owner.

A lot more information is required to see if this will work in your situation. I suggest you work with a pension professional and attorney to review your situation.