Welcome to "The Bottom Line"
October 03, 2017
Welcome to the debut of “The Bottom Line,” a podcast specifically designed for closely held businesses. Our guide is EisnerAmper’s manager of private business services, Tim Schuster. In this episode, Tim breaks down what a closely held business is, the alphabet soup of different business formats such as LLC and S Corp, and how this all impacts the role of business advisors. We’ll also get a sneak peek at other topics we’ll tackle in the near future regarding this noteworthy market segment.
Tell me, when we were discussing a name for this podcast we considered the business types – small, family, privately held, closely held. Tell our listeners what the differences are, if any.
TS: Sure . So, there are a lot of times where you hear different names for businesses and you think, “I wonder where I should be classified.” The four common types of businesses are small business which, from an IRS perspective, is anything less than $10 million dollars in assets.
TS: A family business is one where it is owned by one or two or more family members for example: two brothers, a mother and son, any combination of in-laws and so forth. Privately held is any business owned either by a non-governmental organization or by a small number of shareholders. The important thing to note is that its stock is not publically traded. A closely held business has a limited number of shareholders. Stock can be traded, but not regularly. So, the differences between privately held and closely held are: privately held is not traded on the stock market.
DP:Are there any other kinds of formalized standards – number of employees, revenue, et cetera of what constitutes a small, medium or large company, and who sets these standards?
TS: The Internal Revenue Service sets the standards. Generally, a small business is any business under $10 million in assets. Medium to large companies are anything over $10 million in assets. Personally, I think we need to update those figures; the last time I think they were updated was sometime during the 1960s.
DP:Why is understanding where you fall on that scale important?
TS: To figure out where you’re structuring your business. There are many different formats. But, if you’re a larger company, you have a much more sophisticated way of doing business. Let’s use Johnson & Johnson as an example:
TS: J&J has many different forms of structures where you’ll have a staff, a senior, a manager, a controller and a CFO all working together. So they have much more of a rigid structure on how they perform their operations and how they report their numbers. Most businesses, the “mom and pop” style of business, don’t have as much of a very strict structure. So, depending upon where you are – if you’re looking to grow your business – you want to think ahead potentially to what your structures are.
DP: We hear a lot about different types of business formats. It’s a whole alphabet soup – LLCs, S Corps, C Corps – and so on. Tell us a little bit about these – the pros and cons of each. Again, in a jargon-free zone.
TS: You hear different things, like sole proprietorships and partnerships. After discussing their differences, we should discuss the difference between a limited liability company and a limited partnership. A sole proprietorship means it’s you by yourself. You are an unincorporated business and all of your personal taxes flow through on your schedule C, which is a 1040. So, anyone that has a sole proprietorship unincorporated will file a schedule C. A partnership means you need at least two people involved. So income, deductions, gains and losses are reported on what’s called a 1065, which is a partnership return. And all of that information will flow through to an individual. A corporation is an independent legal entity where shareholders pay for different forms of stock and ownership in the company. The actual shareholders are not legally liable for any of the consequenting incurrences in the business activities. That is important to note.
TS: Let’s talk about S Corps, LLCs, LLPs. An S corporation is unique in that it will actually follow partnership rules where all of the income and losses will pass through individually to a shareholder. The advantage to an S Corp is, from a liability perspective, it is treated the same as a C Corp, which is a corporation and a partnership. If you merge the two together, that’s an actual S Corporation. A limited liability company is very similar to an S Corporation. If you’re looking for this, you may need to talk to an attorney just to make sure you get the ownership structure right. It’s the advantage of a partnership and an S Corp together and that’s the limited liability portion of it.
TS: C corporations are all of those major companies that are on stock exchanges. In some instances, smaller businesses will fall under that structure, but a lot of people will do C Corps just because they have that limited liability. You want to separate the business from your personal assets. So, an LLC, C Corp and an LLP, all have that ability where they are going to separate your legal liability from what the business is.
DP:So, it helps to mitigate risk.
TS: Precisely. The goal is to mitigate risk. And an LLP is a partnership structure. So, an LLP is the limited liability partnership structure and it has all those advantages to mitigate risk.
DP:Now, in talking about these different frameworks, whether it’s a company’s size or the formats, business structure – how does that impact what you as a business and financial advisor do?
TS: Your company size will determine how complex you advice and how sophisticated your advisors might need to be. Let’s say you’re a mid-sized company. You might need a little bit more structure, and you need your accountant, banker, and lawyer all to be all on the same page. The key is who quarterbacks this? It’s the accountant. Many times an attorney will have to contact your accountant to figure out how he or she needs to structure something. The banker may also need to contact the accountant. But, the key takeaway is no matter how complex the organization, the accountant needs to be the lead person with whom you discuss any sort of business strategy so everyone’s on the same page.
DP:As this is the inaugural podcast of The Bottom Line, what kind of topics can our listeners expect in the future?
TS: We’ll touch upon many different topics and discuss day-to-day issues greatly impacting privately held companies such as health care, technology, regulation, succession planning and a host of other news that you can use.
DP: That’s the key – news you can use. On the lighter side, it’s come to my attention that you’re a member of the New Jersey Historical Society. How about giving us a little factoid?
TS: Ah, it would be my pleasure. So, I actually have a two-factoid one for you. Why did we get our name, ‘The Garden State,’ and also did you know we actually had a New Jersey day?
DP:Those, I do not know.
TS: Abraham Browning of Camden gave New Jersey the nickname ‘The Garden State.’ while speaking at a Philadelphia centennial exhibition on New Jersey Day, which happens to be August 24, 1876. Browning said our Garden State is an immerse barrel filled with good things to eat and open at both ends – with Pennsylvanians grabbing from one end and New Yorkers from the other.
DP:Pretty cool., Tim, thanks for being here and sharing your expertise.
TS: My pleasure Dave.
DP:And thank you for listening to The Bottom Line as part of the EisnerAmper podcast series. Visit EisnerAmper.com for more information on this and a host of other topics. And join is for our next EisnerAmper podcast where we get down to business.