Clearstone Wealth Management LLC/IPI Wealth Management Inc.
For more than twenty years, Paul Brown has worked closely with business owners, partners, professionals and family leaders to design and implement effective strategies for their company’s growth, renewal, turnaround and succession. After working as a consultant for Moss Adams, one of the nation’s largest accounting and consulting firms, he became convinced that standardized approaches and cookie-cutter solutions seldom produce lasting, meaningful results. He took a different approach; one that focused on meeting the unique needs, challenges and expectations owners face throughout the life-cycle of their business or professional practice.
Paul has been a hands-on advisor and "interim executive" in the financial industry and has worked with firms and privately owned businesses throughout the United States, including Hawaii and Alaska, and in Eastern Europe.
He started Clearstone Wealth Management, a fee-only investment advisory firm, to help business owners, family enterprises and career professionals prepare for when they face the unique challenges that come when their business, investments and other sources of income and wealth converge to support their long-term and legacy goals.
In addition to having a graduate degree from Bellevue University, Paul is a proud member of the University of Iowa Alumni Association (Go HAWKS!) and a life-long fan of the Chicago CUBS. Yes, he had tears in his eyes when the CUBS won the 2016 World Series.
In his spare time, Paul plays golf, skis and enjoys his family. In warm weather, he can be found riding his motorcycle through one of the area's beautiful mountain ranges.
MA, Leadership, University of Iowa and Bellevue University
Assets Under Management:
Investment advice offered through IPI Wealth Management, Inc., 226 W. Eldorado St. Decatur, IL 65222. PHONE: 217-425-6340. Clearstone Wealth Management LLC is not affiliated with Investment Planners, Inc. or IPI Wealth Management, Inc.
I would assume that when you first made the deposit you claimed a deduction for that expense. Using simple math this means that if you had a $100,000 profit you would have been able to deduct your $4000 deposit and pay taxes on just $96,000.
Now, years later, you will have to give an account for the $4000 that comes back into your account. You can 1) ignore it in the hope it will go away; or 2) claim it as income. If you've claimed the deduction you will need to claim the income (sorry ... it's just the way things work). However, if you did NOT claim the initial deposit as a deduction then you will not need to claim the income. Even if you have received a W9.
Not only can you not sell shares that belong to someone else, you may not be able to sell your company without first resolving the missing shareholder/shares question. That last statement depends, of course, on your corporate papers.
First, you will need to find the rightful owners of the shares. If they died, chances are their heirs have not. Once you find them, you'll need to take control of the shares either by having them assigned to you, buying them, or negotiating the sale of these to prospective buyers. That last option, of course, does nothing for you.
It sounds as though you are trying to get some cash without diluting your ownership. You'll get in trouble, if you go down the path you had considered. You may also get yourself in trouble if you buy the outstanding shares from the shareholders of record (and/or their heirs) without disclosing the possibility of a having a prospective buyer.
In your case, I would start with a reputable business attorney and follow his/her advice.
Great question. And, I'm glad you're asking this now, before it's too late.
What you are really asking is, "How do I take on partners and how do I determine the share price of the business?" Right?
First, let me give you my standard cautionary line: be very careful about doing this since minority shareholders have rights that can be exceptionally burdensome to you, the owner. If your intent is to reward employees, you do not need to start out by diluting yourself. With a simple employment agreement, you can offer them a share of the profits (create a profit sharing plan) and even a percentage of the sale of the company (if this is your intent). If you go this route, you'll still be firmly in control and will not need to open your books, business plan, etc. to others. There's my warning.
You also mentioned, however, the possibility of receiving small investments ("like $15,000"). Again, I would encourage you to do your homework and first determine what you will need to stay in control. With my clients, I start at 90% (the owner will retain that much ownership) and seldom - if ever - go below 60%. Let's assume you want to retain 80% of the company's shares (or LLC units). Let's also assume you are willing and/or needing an additional $40,000 from investors. The pre-money value of your business would need to be $160,000 for you to retain 80% of the business ($160,000 + $40,000 = $200,000 post money value).
That's the easy part. The challenge will be to convince investors - and possibly yourself - that your business is worth $160,000! Put another way: "Why would I want to buy it for $160,000?" Do you have a patent? A restricted area? A history?
Perhaps a better alternative would be to offer a convertible note. You could, for example, investors a 10% return on their $40,000. Then, in five years (or so) they could either receive their principle (the original $40,000) or 20% of the company. If you do really well and the business is worth $1MM, they would have received $20,000 from their loan and could receive shares (or LLC units) worth $200,000.
Whichever way you choose to go, be sure to think it through. I would hate to see you take on an unnecessary burden while you are just starting out.
All the best -
The short answer is, "Yes."
The longer explanation is that you may want to consider doing both. Let me explain.
In our firm, we create both strategic and tactical investment portfolios. Our strategic investments are intended to weather different economic and market changes and are, therefore, intentionally designed for limited re-balancing. Don't get me wrong: we don't do "buy-and-hold-and-pray." We "buy-and-monitor" and adjust if and when necessary (changing managers, for example). But by and large, over the course of the year, these portfolios are fairly stable and work well in a brokerage account. By holding onto the ETF for more than a year, you would be taxed at long-term capital gains rate of 15% - 20%, and not the much higher short-term or ordinary income rate.
Our "tactical" portfolios are reviewed and rebalanced on a monthly basis. If an asset class, for example, starts falling out of favor (as evidenced by its falling price) we will sell it and replace it with one that is performing stronger (as evidenced by its rising price). We also set "triggers" for these assets and will sell out of them if the losses reach a pre-determined amount. Because of the extra movement, we prefer to use this strategy in a tax-deferred account in which the tax event will not take place until the funds are actually withdrawn.
Bottom line? Why not do both? First, create a diversified portfolio using index-based ETFs in a brokerage account. Keep an eye on this but plan on limiting your trading over the course of a year. Then, create a tax-deferred IRA that may require more active trading?
I think you'll be pleased with the result.
Are you ready for my insightful answer? It depends!
The first question I would ask is, "Why do you want to pay off your home mortgage?" In today's low-interest environment you are probably earning more from the return of your 401(k) than your mortgage interest. And, your mortgage interest is a tax-deductible expense, further reducing its impact. For example: if you take out a 30 loan on a $300,000 mortgage at 4% interest you could save about $54,000 in taxes (assuming a 25% tax bracket) over the life of the loan. I know: those are broad numbers that will need to be fine-tuned for you. But at least you understand by thinking.
The second question I would ask is, "How many deductions do you expect to have after you retire?" Unfortunately, most of us aren't asking that and are surprised to find that a significant portion of our Social Security benefits can be taxed! And this tax can - will - have an impact on our post-retirement income. When people retire, they typically have fewer deductions to claim when filing their taxes. The house is paid for. The kids are out of the house. We give less to our charities and churches. This means that our "provisional" income - what the IRS calls the income we receive to determine whether or not our Social Security benefit is taxed - is higher than we expect. If you choose not to pay off your mortgage, you would keep your mortgage deduction and this could reduce the amount of taxes you pay after your retire.
My third question, and my last one in this note, has more to do with your reasoning. "Why do you want to pay off your mortgage?" Without saying that this is a bad idea, I would say that with one of my clients the desire had less to do with her financial situation and more to do with the "emotional freedom" she would have if her house were paid for. After we went through our analysis, we showed her the impact a mortgage interest deduction could have on her post-retirement net income. We then re-allocated her investments and created a "mortgage reduction" portfolio. These funds were invested in a relatively conservative manner with the goal of out-producing the interest on her mortgage. Over time, she has watched her mortgage go down while her "mortgage reduction" portfolio continues to grow.
This isn't the plan she had expected. But it is the plan she is glad she is in.