The Common Business Entities

Here is a summary of the entities most commonly used in business. There is actually something like 30 entities that can operate a business. There are four that are commonly used.

1-Schedule C self-employed with no credit protection. Owners can be sued individually.
2-Partnership with no credit protection. Owners can be sued individually. Those have been around since the time of Christ.
3-Corporation with limited liability. Widely known as a C corp because it’s taxed according to Chapter C of the Internal Revenue code. Owners cannot be sued for unpaid business costs. This came on the scene in 1700 when investors had a need for liability limits to raise large amounts of money. The initial purpose was to create the East India Company that governed India & half of China for two centuries. This was by far the biggest & most profitable economic enterprise ever. The corporation is the only entity that pays income tax directly to the government.
3a-S Corporation with limited Liability. A C corp. which elects to be taxed as a flow though organization that pushes out profits & losses to be reported on the owners tax returns. Commonly known as an S corp. Taxed under chapter S of the Internal Revenue Code. Profits & losses flow through to the owners and are reported on their tax personal tax returns. That’s why you will sometimes hear the terminology “flow through companies” for entities that don’t pay tax directly to the government. Corporations & LLC’s commonly elect to be taxed as an S corp. This does not affect their legal protection. S corps are limited to 100 owners. That’s why all the big companies such as General Motors of Amazon are C corps. After 300 years all states have come to agreement how to tax corporations & S corporations.
4-LLC with limited liability. This came on the scene in 1971. Owners cannot be sued individually as long as there are two or more owners. There is still disagreement on how LLC’s should be taxed by states. Wyoming created the LLC in 1977 to satisfy a demand for a partnership with limited liability. It has the same structure as a partnership and files taxes on the same tax return, but it has limited liability as long as there are two or more members. Owners are referred to as partners in a partnership, & as members in an LLC. LLC’s commonly elect to be taxed as an S corporation. It is a toss-up whether S corp’s or an LLC’s are the most popular business form in the U.S.

Corporations have been around since 1700 and the law is basically settled. In every state corporations are treated essentially identically. LLC’s are relatively new (50 years) and the states have not yet come to agreement how they will be treated. In some states they are treated well, and in other states they are not a good alternative. We create most new LLC’s under WY law or South Dakota or Nevada because those states have charging orders that make an LLC almost bullet proof against law suit or collection activity of any kind.  Nevada also has charging orders for corporations.

For most small businesses an S corp or an LLC with an election to be taxed as an S corp are the best entities. Each of these four entities are subject to different tax treatment and can deduct different expenses on their tax returns.

A significant part of our practice is determining the proper combination to use to incur the least amount of tax.

 

CFO Services

A virtual CFO (Chief Financial Officer) is an investment in the growth of your company. As every business grows, something happens. The more they grow, the more background, bureaucratic chores consume your time. If you don’t get control of this trend, it will eventually swamp your business & your dreams along with it. Outsourcing frees your time to focus on achieving key core business goals and planning. We pull the busy work off your plate.

This is why you went into business in the first place instead of just getting a job. We pull the hated, boring, tedious but necessary functions off your hands and give them to people on our staff that love doing it. Believe it or not, there are people who love doing it. You don’t love doing it. You should fire yourself and hire us. That will make us both happy.

In addition, our qualified CFO talent is available for advice & CFO consultation. He or she is a crucial member of your strategy team. 

We have significant experience as CFO with Fortune 500 companies. 

Virtual Chief Financial Officer

CFO is an outsourced service provider offering high skill assistance in financial & administrative requirements of an organization, just like a chief financial officer & his staff do for large organizations.

Ellis experienced CFOs, executives, accountants & tax professionals perform administrative, accounting & payroll functions can help owners, management, and board members solve financial management & operational issues by providing unique guidance and advice. See business services.

You can depend on experienced, high-level professionals to provide the financial insights you need to meet the challenges you face. We provide all the back room services you need; as well as advice, explanations & recommendations.

    • Financial strategy
    • Short & long term forecasting
    • Financial systems strategy & design
    • Budgeting
    • Projections
    • Facilitating & supporting financial reporting
    • Raising capital
    • Interim CFO services
    • Cash flow analysis & restructuring
    • Renegotiating vendor contracts
    • Restructuring client contracts
    • Ensuring pricing is aligned with company & industry trends
    • Analyzing commission structures
    • Supply chain management
    • Attributing costs to revenues
    • Accounting & bookkeeping
    • Payroll
    • Financial Statement
    • Bill pay
    • Collections
    • Data driven management
    • Capture & interpret critical operating data
    • CFO service
    • Streamline & simplify
    • Cash management
    • Remote office
    • Management financial statements
    • Compiled financial statements

Corporate Reorganization

Business reorganizing or restructuring is an action taken by businesses to significantly modify the structure or the operations of the company. This usually happens when a company is facing significant problems and is in financial jeopardy. But it often happens to enhance it’s competitive position, to protect its assets or to get out in front of a problem. It’s another tool in their tool box. Some examples of Global 500 companies:

Global 500 Re-orgs

  1. Forbes announced, Jeff Bezos is unloading a billion dollars of Amazon stock.
  2. In 2015 Caterpillar announced restructuring and cost cutting plans right before they were hit with a $2 billion penalty for tax fraud.
  3. In 2018 John Deere announced realignment of leadership responsibilities.
  4. Humana’s CEO-founder had twice before had shifted the company’s course to a brand-new industry.
  5. Chase Manhattan Bank and Chemical Bank used their merger as an opportunity to both reduce operating costs and achieve an important strategic objective.
  6. Scott Paper‘s chief executive officer (CEO) decided to implement the layoffs quickly—in less than a year—to minimize workplace disruptions and gain credibility with the capital market.

We’ll probably never know why they reorganized. What matters is they reorganized for some reason. Despite the massive size of Global 500 companies, and despite the difficulties presented by re-organizing a massive company, they are not afraid of re-orgs.

Privately owned business re-orgs

Privately owned businesses seldom re-organize.  It’s just not one of the clubs in their bag. They’ll ride their present structure right into the ground even when the company is collapsing around them.

Never fall in love with your company. You can fall in love with your business. A business has value because that’s how you make money. A company is a legal creation for operating a business. Nothing more & nothing less. Most people don’t think this through well enough and get the two confused. A few years of operating your company like it was your business can put you in vulnerable position.

If most companies lose a lawsuit, they could lose everything they’ve been building all their lives. If they win, the litigant can strip your company bare. We plug that hole through business re-org by removing everything of value from their operating company and putting it in an LLC that does no business what-so-ever. It never does anything to get itself sued. If everything of value is in the LLC, and the mothership loses a lawsuit, you can just shutter the doors and start over again with a new company the very next day with everything of value behind an impenetrable LLC barrier. The LLC just needs to license it to your new company, and you’re good to go. Since you own both of them, there are no barriers.

Business restructuring and reorganization is one of our strengths. I personally have been involved in two Fortune 500 re-orgs & countless re-orgs of private companies.  Not all of them have followed the approach we describe in this post. There are many ways to re-org and many things a business wants to accomplish. Every private re-org I was involved with succeeded without repercussion. We re-org our clients frequently for tax purposes. We have significant expertise in this area.

An actual example.

A few months ago I got a call from a client who was being sued by a marketing company. They had entered into a contract and the marketing business failed to perform, so my client quit paying the marketer. But there was a contract, and the contractor sued the company, but not the individuals. There was no way to sue the individuals. Their lawyer was vigorously defending the suit. He warned them it could cost several thousand dollars to defend suit. He also warned them, they could lose the suit.

For some reason they called me.

  1. I questioned them and discovered they hadn’t recorded any business assets. Their company was basically a vacant shell. There were assets, but no assets had been recorded in the company. They were still owned by the owners.
  2. I advised them to abandon the company.
  3. I also advised them to simultaneously form two new companies, an LLC to hold company assets, and a corporation to operate the business.
  4. I then advised them to legally transfer all the business assets into the first new company (an LLC), including web sites, trade names, trade secrets, and everything essential to carrying on businesses. Since they had never trademarked their name, I suggested the do that in the name of the LLC.
  5. Simultaneously again. I advised them to open new bank accounts in the name of the new corporation and begin conducting business in the new corporation.
  6. I also advised them to run this past their lawyer. He said it would work. The only thing he suggested is to file bankruptcy on the old company that had failed. That was a good final touch.
  7. It did work. The marketing company, rightly or wrongly, was got nothing but legal fees.

Tax savings

This methodology is one of my favorite re-orgs. It is used to protect vital assets and to change the character of earnings. It can also be used to eliminate C corp taxation by removing earnings from a C corporation and turning it into royalty income on the personal returns.

That eliminates an entire level of taxation.

 

Attack of the Nerds

Strategy Consulting  

The attack of the nerds  

I’ve been reading the Lords of Strategy by Walter Kiechel III which is about strategy consulting – McKinsey, Boston Consulting, Bain and others.  The book was wildly interesting through the first half and disintegrated towards the end. Halfway through the book, he made a statement that made it sound like the book should end here. It wouldn’t have been complete, but from an interest standpoint, this was the end. The first section was about the wingnuts and those who invented consulting. The last section was more about academics and other less interesting stuff. Regardless, the obvious conclusion was never reached. If you have any idea what you’re doing, consulting is a waste of time & money. If you don’t, it’s probably a still a waste of time & money.

The book was terribly informative about the history of strategy consulting. It covers the entire gamut of American strategy consulting going back to the 1920s and 1930s when Alfred Sloan transformed General Motors into the first modern corporation and McKinsey began consulting the things GM did that made GM successful.  I was impressed by the breadth and depth of the book, but less impressed by consulting which is obviously not what it’s cooked up to be. I was looking for a bit more substance from the profession itself.

I was also disappointed my alma mater didn’t even warrant a mention. Andersen Consulting/Accenture. But, although they’re promoting strategy today, that has probably never been their strength.

Let’s face it, we’re talking about the people who grew up playing video games. Originally, most consultants were engineers, and they still are. But PhD’s and MBAs are also well represented. If there’s a difference between these people and everyone else, it’s their focus on formulas, and they’ve built up a long list of them. The problem is, they’re interesting & famous & well known, but none of them work.

I’ve waded through all the big business formulas brought to us by strategy consulting, from decentralization (GM’s move to break up the company into independent units or subsidiaries), Growth Share Matrix (cash cows, stars, question marks, dogs), experience curve (costs fall 25% as volume doubles), SWOT analysis (strength, weakness, opportunities, threats), three C’s, five factor framework, seven S framework, value chain, etc., etc., etc.

What I have come to realize as I read this book is that business consulting was the original ‘attack of the nerds’. It’s all an attempt to reduce success in business to a formula. A + B = C. Doesn’t work. Hasn’t ever worked, They’re all looking for the next big thing that will explain everything. But they never find it. They do however, keep changing their minds about what the big secret to is. Which of course keeps the cash register ringing and keeps a big hazy shroud around what they do and how effective their advice is.

Next to war, running a business is the most complicated & complex endeavor on the planet. Far more complex than physics or calculus or engineering, because these are all formulaic. They respond to a set of rules and axioms. But in business (and war) nothing is that way, everything is fluid and ever changing: the landscape, the players, the tools, the medium, etc.

But then, perhaps no one really expects consulting to work. Perhaps it’s just a smoke screen. The big clients of consulting firms are insecure CEO’s who pay big dollars to be reassured, albeit with a long term consulting contract.  Or executives looking for expert opinions to back them up. Which makes you wonder whether the results are dialed up in advance? In many cases, very likely. The book made the point, that consultants are leery of surprising C suite executives whose patronage they rely on.

In the final analysis, most consulting stuff doesn’t work; not in the way consultants wished it did. All of the breakthroughs I mentioned in the fifth paragraph were reverse engineered. They were the result of an observation and they’ve yet to be proven capable of directing the future, which is the ultimate goal of consulting.  This realization drives consulting to find another rainbow with another pot of gold which this time possibly will work.

But business success can never be reduced to a formula.  

Here is the secret sauce of business success, the one thing that will work every time, the one thing nobody will pay good money for, but the one way every company can add significant competitive edge – –

Be easy to do business with and do everything right the first time.

It isn’t like this is a new idea. This has been around since time immemorial. Both Steve Jobs and the Brazilian trio used this to make record making accomplishments. This is nothing but business processes, systems and customer service.  Or if you wish, continuous improvement & constant cost cutting in a full blown meritocracy.

Nothing else works. If you want to succeed, this is how to do it. Otherwise you’re just babysitting your customers until the day Amazon, or Apple, of Google, or Caterpillar or someone down the block (who came to see us) takes them away from you. They will, you know. They’re spoiling them right now.

“Good artists copy, great artists steal.” (Pablo Picasso and Steve Jobs).  What the heck. This stuff works and consulting doesn’t.

Apple has been proving this for years as they watched your customers sleep in the streets to get first crack at paying three times as much for their products. Everybody thinks it’s the innovation, but innovation is a flash in the pan. Today Apple’s innovation is old & stale and there are tons of imitators trying to beat them to death with price, without success. Apple is making it on its business processes, it’s reputation and its fabulous customer service.

Think Apple Stores and iTunes. Think Amazon. If there’s a formula, this is it. And it’s not something some nerds discovered in their garage.

Another example: The fact that GM outperformed Ford (first mentioned above) is a solid example that business processes & systems outperform innovation. Ford was first to the table and invented the assembly line, which you would think would make Ford unassailable, but GM brought processes & systems to the table and dominated Ford far a century.

Game theory

Or so to speak … One thing more that’s a little off track, but is oddly related to the foregoing conversation. “Game” is an attempt by the same nerds to reduce love to a formulaic approach. These people obviously love formulas. Push-pull, cocky funny, so on and so forth. Both strategy consulting and game have their strong points; they will improve an otherwise dismal record. Something is always better than nothing, but all in all, the approach is insufficient.