Here's a brief look at the most common retirement savings strategies you may want to consider.
Understanding IRA options
Individual Retirement Accounts (IRAs) are available to virtually any individual (or spouse) with earned income. Because IRAs are sponsored by individuals, they are not subject to an employer relationship.
Upon retirement, the IRA owner can choose to take a lump sum benefit payment or a series of benefit payments. There are four kinds of IRAs -- deductible, nondeductible, Roth and rollover IRAs. Each has its own unique advantages that vary with an individual's situation.
Individuals under the age of 70 who earn an income may contribute to a deductible IRA straight out of their paycheck, provided they follow certain rules. Investment earnings within this account grow tax-deferred. Withdrawals are taxed at current ordinary income tax rates, but withdrawals taken prior to age 59 are subject to an additional 10 percent excise tax.
A nondeductible IRA is funded with contributions that have not been deducted from an individual's current income. These contributions are not taxed when withdrawn because they have already been taxed. (Account earnings are taxable, however.)
Roth IRAs are similar to nondeductible IRAs, but earnings and eventual benefit payments attributable to these accounts are not taxed. Roth IRAs are attractive to individuals who expect to be in the same or higher marginal tax bracket in retirement.
Certain tax penalties do apply if benefits are paid out within five years from account inception or prior to age 59. Another major advantage of Roth IRAs is that they are exempt from minimum required distribution rules. This means that Roth IRA accounts can be conserved and left to heirs, who then must begin to take tax-free distributions over their remaining life expectancies.
Rollover IRAs are another option when you retire or change jobs. By moving eligible rollover distribution assets to an IRA, you can defer paying some or all taxes and penalties
Adding benefits with employer-sponsored retirement plans
If you are eligible for an employer-sponsored retirement plan, several alternatives can substantially increase the annual contribution you make.
Some small businesses use Employer Sponsored Simplified Employer Plans (SEP IRAs) as a funding vehicle. Unlike a traditional IRA, the employer funds these SEP IRAs, although some "grandfathered" plans do allow employee contributions.
SEP IRAs are usually held in the same types of accounts that hold IRAs. SEP IRAs provide either a lump sum payment or periodic withdrawals upon retirement.
Other small businesses establish Savings Incentive Match Plans for Employees (SIMPLE) plans using IRAs as the funding vehicle. SIMPLEs include employee deferral arrangements similar to those of 401(k)s. The employee funds these on a pre-tax basis. Employers are required to make matching contributions or a guaranteed base contribution. Principal and interest grow tax deferred.
Employees fund 401(k) Profit Sharing Plans through before-tax salary deferrals. Employers may also contribute through discretionary matching or profit sharing contributions. Unlike IRA-based programs, employees may borrow a portion of the vested benefits or take "in-service" distributions if permitted by the plan. Because contribution limits are higher, these plans are the most regulated.
In most cases, withdrawals from pension plans made before age 59 1/2 are subject to a 10 percent penalty. Withdrawals usually must begin by April 1 of the year after you turn the age of 70 1/2. Income taxes are also due upon withdrawals in most cases.
Many pension plan limits are set to change. By contacting The Ohio Society of CPAs' free Ohio CPA Referral Service, you can find a CPA in your area who can explain these changes and help you plan for a secure retirement. Jeffrey H. Tucker, CPA is chair-elect of The Ohio Society of CPAs Executive Board and a partner at Rea & Associates Inc. in New Philadelphia. For more information about The Ohio Society of CPAs' free CPA Referral Service, call (800) 686-2727.
Businesses with small to moderate space requirements are usually presented with the landlord's "standard form" office lease. Few are standard to the industry -- most are merely standard for the particular landlord's use -- but most have common provisions, and all are subject to negotiation.
Because of time pressures and the desire to limit legal expenses, the small to mid-sized standard form office lease tends to receive less attention than leases designed for large space needs. However, attention to and negotiation of a limited number of areas in a form office lease can enhance your office operations and avoid unexpected expenses.
* Understand your space. Space in most office buildings is leased on a "rentable" square foot basis. Various methods are used to calculate rentable area, but all involve the addition of an "add-on" factor, in which a pro rata portion of a building's public or common areas is added to the tenant's actual usable space to determine the rentable area. This can constitute from 5 percent to 20 percent of the rentable square footage of your space. If possible, require the landlord to warrant the size of rentable and usable space and disclose the method of calculation. At a minimum, require the landlord to disclose the amount of the add-on factor.
* Make the landlord deliver. Most form leases contain provisions that relieve the landlord from responsibility if the tenant's space cannot be delivered on the anticipated date. Delays in the tenant taking occupancy may result in holdover costs for and damage claims against that tenant by the landlord whose space it is vacating. Require your new landlord to deliver your space by a date that will enable you to make an orderly relocation and provides some time cushion if delays occur. Provide for a right to terminate the lease if possession is not delivered within a reasonable specified time after the anticipated date.
* Examine the operating expenses. Most form office leases provide for the tenant to pay a pro rata share of building operating expenses and take a broad approach in describing these expenses, but many fall within the description that cannot properly be included and should be expressly eliminated.
Although equitable landlords will not pass on many of these costs even if not expressly excluded, the prudent tenant will ask for an express exclusion of expenses including capital expenditure; cost of repairs due to casualty or condemnation; repairs or maintenance paid by warranties or third parties; depreciation of the building or building equipment; leasing commissions; legal fees and expenses; costs associated with the landlord's offsite operations or general overhead; installation of tenant improvements; correction of defects in the building; advertising and promotional costs of the landlord; fines or penalties resulting from the landlord's failure to comply with laws or because of late payment of property taxes by the landlord; and management or administrative fees in excess of those normally charged in the local market.
* Provide for adequate landlord services. Many form leases contain only a general description of the utility, HVAC and janitorial services the landlord is obligated to provide. Services are usually provided only during business hours, and often the quality and quantity of services are provided at the landlord's discretion. Make sure the lease contains services that are adequate for your normal operations and provides for services for any special needs of your business, such as specialized equipment and after-hours operations. Request minimum quantities or specifications for electrical, HVAC and janitorial services.
* Require the landlord to comply with legal obligations. Form office leases tend to impose overly broad obligations on the tenant to comply with legal requirements applicable to the leased space. Narrow the focus to cover only the manner in which the space is used, as opposed to obligations that may arise because of pre-existing physical conditions in the space.
Require the landlord to deliver space at the term commencement that complies with legal requirements, including the obtaining of a certificate of occupancy if required. Eliminate tenant obligations for modifications to the structural components of the building or building systems that are necessary to bring the premises into legal compliance. Those modifications tend to be costly and arguably should be the landlord's responsibility if they are generally applicable to all similar types of office buildings.
Require the landlord to keep the common areas in compliance with legal requirements, including any imposed by laws pertaining to disabled persons.
* Know your repair obligations and alteration rights. Make sure both your and the landlord's repair obligations are clearly delineated. Avoid the obligation to maintain building system components unless they exclusively serve your space. Attempt to provide that repair obligations related to building systems or other components include only ordinary maintenance, not replacement.
Form leases usually require the landlord's approval of alterations to the space. Request provide flexibility to perform decorative, nonstructural alterations.
* Obtain expert insurance advice. Your form office lease contains required types and amounts insurance coverages and may contain requirements for specific policy provisions. Forward this section to your insurance professional to obtain confirmation that the landlord's requirements conform to your business needs and will not result in unnecessary or prohibitive expense.
Require the landlord to carry full replacement fire and extended property insurance on the building, and make sure the lease contains a mutual waiver of claims provision whereby the landlord and tenant each waive claim against the other for damage to its property caused by occurrences that can be covered by customary fire and extended coverage insurance.
* Obtain practical assignment and subletting rights. Most form leases require the landlord's approval for assignment and subletting of space. Many prohibit transfers of beneficial ownership interests in the tenant.
Request the right, without the landlord's consent, to assign and sublet to affiliated persons and entities if needed for your business operations, along with the right to assign the lease to any person or entity that purchases your business. Provide for the right, without the landlord's consent, to transfer beneficial interests in the tenant that conform to your business needs.
* Temper severe landlord remedies. Most form office leases contain rigorous landlord remedies in the case of a tenant default. While the landlord should be entitled to reasonable remedies, attempt to eliminate rent accelerations or other remedies that provide for payment by the tenant of rent after occupancy rights have been terminated without a corresponding credit for reletting proceeds or for the rental value of the space.
* Eliminate personal property liens. Form office leases often contain a contractual lien covering the tenant's furniture, equipment and other personal property within the space to secure payment of rent. In most states, a landlord is provided a lien by statute -- commonly called a distress for rent statute -- on this same property.
The contractual lien in form leases is a personal property pledge under the Uniform Commercial Code and is in addition to the landlord's statutory lien. If the tenant finances furniture or equipment, this will most likely run afoul of those financing arrangements. Many tenants have loan covenants in credit facilities with their primary business lenders that prohibit this type of contractual lien. The contractual lien remedy is rarely used by landlords; ask that it be eliminated. Depending upon the terms of your financing arrangements, you may need to ask for an affirmative waiver by the landlord of its statutory lien rights.
* Eliminate relocation clauses. It is common for the form lease to contain provisions that allow the landlord to relocate the tenant to other space in the building. While these usually purport to effect the relocation at no cost to the tenant, the disruption to your business and the hassles make it worthwhile to request elimination of these relocation rights.
* Read the rules and regulations. Form office leases often contain a lengthy list of building rules and regulations relating to a broad range of operational activities, such as interior signage, use of service elevators, weight limitations for equipment, the ability of the tenant to have a vending machines, and approval of persons the tenant may hire to perform routine maintenance. Review these with an eye to their conformity to your operational needs. Request the landlord to waive any rule and regulation that conflicts with any reasonable intended activities in your space.
Finally, be reluctant to accept the following response by the landlord's representative to your proposed modifications: "It's our standard form provision." Your business will be spending a significant amount of money on, and you and your co-workers will be spending a substantial amount of time in your new office space.
Make sure your lease provides adequate rights for the occupants of the new space to enjoy the sojourn there.
Timothy N. Tucker (Ttucker@kslaw.com) is real estate counsel with King & Spalding LLP. Reach him at (404) 572-4806.
Technology, commerce and the law rarely coincide in a single case. When it does happen, the results can be dramatic.
This convergence occurred in State Street Bank & Trust Co. v. Signature Financial Group, in which the Court of Appeals for the Federal Circuit held that if the requirements of the Patent Act are otherwise met, business methods are patentable. Now, the opportunity exists for capitalizing on the business method patent wave and excluding competitors from using a business method.
Put another way, businesses can now patent the methods by which they operate, thereby creating a barrier to market entry for potential competitors.
Background of business method patents
Business method patents include virtually any method for conducting business as long as the method utilizes a computer aid. Otherwise it meets the requirements in the Patent Act of utility, novelty and nonobviousness.
Business methods can include the way a business is structured, managed, organized or executed. One particular area in which the filing and issuance of business method patents has been embraced is in e-commerce. Many e-commerce start-ups actively seek business method patents to block competitors and stake out their corner of the Internet. They correctly view patents covering their business methods as one of their only assets with potential value.
Business method patents have encountered widespread publicity, thanks in part to a few well-publicized lawsuits, particularly that involving Amazon.com's infamous one-click ordering patent. Media attention has raised public awareness that these types of patents can be another weapon in the battle to beat competitors for market share.
This publicity has also generated concern in some corners that the patent system is being abused.
Concerns about business method patents
Awareness generated by business method patents has naturally engendered concerns. Skeptics have created apocalyptic scenarios such as a single bank foreclosing all other financial institutions from offering home banking services based on a single patent.
Others argue that State Street went too far in liberalizing patent law. The federal circuit, however, has downplayed such scenarios and stated that the requirements of novelty and nonobviousness will preclude these situations.
Over the next few years, the Patent Office and the courts will likely address these concerns. Nevertheless, business method patents appear to be firmly entrenched.
Developing a business method patent strategy
No matter what the concerns and criticisms, businesses cannot ignore that for the foreseeable future, proprietary business methods are patentable and many businesses may be able to protect these methods.
Furthermore, as many financiers seek out promising new technology companies whose primary, or only, assets are their ideas, the importance of protecting these ideas may become paramount to the company's survival. Thus, the savvy business will develop a strategy for protecting its business methods.
For the start-up, a business method patent can often lead to higher valuations and make it difficult for larger, established entities to enter the start-up's market space. Analysts often see promise in a company's intellectual property, and with many start-ups, intellectual property is often one of their only assets. Also, the ability to establish a defined market presence by excluding competitors can be vital to a start-up company's survival and an existing company's growth plans.
Start-ups should look to business method patents as a way to help define their place in the market while providing some breathing room during initial growth stages. Existing companies may look to patents as a way to establish beachheads in new markets.
Another factor driving companies to evaluate and establish programs for protecting proprietary business practices is the unforeseeable future. Since no company knows exactly what patent applications its competitors may have filed, the smart entity will review its practices and attempt to stake out a strong position barring competitors from using the same methods, if only to protect itself from competitors doing the same to it.
Even though the full scope of these patents will not be completely known for several years, every company should assess the extent to which its business relies on potentially patentable methods. Such an audit can aid the company in determining whether rights exist that should be protected, as well as help avoid disputes with competitors. Todd Tucker is an attorney at Arter & Hadden LLP and a member of the E-Group, a multidisciplinary group of attorneys which focus its practice on entrepreneurs, Internet, e-commerce and emerging growth companies. He can be reached at (216) 696-4661.