So can business equity, as unpleasant as it might be to do.
And conversely you as shareholder, to be allocated as per executive management, who is controlled by BOD, who are elected by… you as shareholder (assuming an incorporated business and the normal partnership agreements and laws of your state).
If you pay through all the earnings as income to shareholders (like an S corp) then there should be no earnings (or nearly none) on your K1, meaning you won’t have any income you didn’t receive. The market value of the company is another thing, I understand… but if that were not how it worked, what would stop very successful businessmen from taking no salary prior to applying for FA and saying “my partners won’t pay me”?
Here’s where I must politely disagree. You DO have those assets, you just choose (smartly) to not liquidate them.
My problem isn’t the assets. It’s how they look at gross receipts, but don’t look at the cost of those items. I don’t think anyone can argue that is fair.
@class0f2017 , I would agree with that. But what am I missing? Because on the form I googled it seems accounted for below in bold:
Business Income
a. Gross receipts of sales
less returns and allowances
**b. Cost of goods sold and/or operations
(Don’t include salaries paid to yourself,
your dependents or others, or any item
listed below.)**
c. Gross profit (Line 10a minus 10b)
d. Other business income
Again I must apologize as I have not filled one of these out myself, so I am not expert and trying to learn here.
@Madison85 Idk if colleges consider extra materials like that.
That makes sense. I was just worried that the high gross receipts would be misinterpreted and make it look like we have a lot more money than we do. The net income is reported in the beginning and I guess that’s the important number.
You are probably over-thinking this. Include all of the expenses you have in your business. If the schools wants to take some out, that is their prerogative.
@BelknapPoint - I am specifically talking about people who do not own their companies outright. My husband owns 50% of the law firm. His partner owns 50%. The assets do not belong to my husband. They do not belong to his partner. They belong to the firm, which is a completely separate entity from either one of the owners. If my husband spent the firm’s assets on tuition he would be stealing from the company. The firm’s assets are 100% unavailable to my husband for any purpose other than running the firm (paying rent, salaries, firm expenses, etc.).
@thumper1 - I am not saying that at all. I am saying that assets in a corporation are not at the disposal of the owner of the company if the company is not 100% owned. If it is 100% owned that is a different story.
@Postmodern - My husband owns a law firm. Other than the cash in the bank the firm has little value. It is not really worth anything on the open market.
We don’t have a K1. This is a C Corp. We file an 1120. When the 1120 is submitted a balance sheet is attached so colleges will see the balance sheet. There isn’t much in the way of assets other than cash and receivables. Some firms have lots of assets that are not readily saleable and that are used to fund the business. For those people those assets are not readily available. They belong to the corporation, not the owners.
Additionally, this is NOT about me. I do not expect to get any FA regardless of what is on the CSS Profile. I do think that it can be very deceptive when colleges look at JOINTLY OWNED businesses and assume that the assets of the business are available to the owner for college.
@class0f2017 - If you submit your 1120 won’t COGS be on the form? We don’t have inventory so I am not familiar with what is reported for other sorts of businesses.
And who does the firm belong to? That’s right – half belongs to your husband and half belongs to his partner. They both own 50% of a business which has a value, because it has assets. Presumably, one partner could sell out to the other, for a price. Or both partners could sell part of the business to and welcome a new lawyer into the firm. Or they could sell the whole thing outright to a different law firm. The business has a value beyond the cash in bank accounts. It has accounts receivable. It has a client list (hopefully a large one) and a reputation in local legal circles (hopefully a good one), and these things have value in and of themselves.
What’s 50% of the stock worth? At what price would a willing buyer and a willing seller come to terms? (And don’t say it’s worthless - because you wouldn’t just give it away).
Lawyer can sell a ‘book of business’ but you can’t guarantee the clients will go to the new lawyer so buying the book has a risk. The clients can go with the attorney to a new firm, stay with the old firm, or find a new lawyer. Some types of law practices have more sale value than others. Corporations tend to be repeat customers, but criminal law? Let’s hope not.
Ummm, just because there is a line on a form that asks about the value of business interests that you own does not necessarily mean that any given college is going to expect you to liquidate those business interests in order to pay for your child’s tuition. It’s just part of a bigger picture of your family’s overall financial strength.
@BelknapPoint - Law firms have very little value without the people who generate the business. I don’t think this need to be about me. The point is that people who own businesses with others do not have access to the cash. It isn’t their cash. While it is true that they own the business that owns the cash they do not have access to the cash. They accounts receivable are not available to pay college tuition, car payments, or other household bills.
Again, this will not really affect us as our income alone will be high enough so that we do not qualify for financial aid. One of the schools my son is applying to requires the CSS Profile in order to qualify for merit aid so we filled it out. I also filled it out when my oldest applied to college (same reason).
I understand the need for colleges to assess all sources of funding when doing financial aid calculations but I do think that assuming all business assets are available to fund college can sometimes be a wrong assumption, especially when the business in question is not wholly owned. I realize that people who do not own businesses sometimes think that businesses are places where people can hold all sorts of money away from scrutiny. The truth is that whether that can be done depends on the individual situation. When running a business with a brick and mortar location and employees there needs to be cash around to run the business itself. The same is true for retail and manufacturing businesses. There needs to be cash to invest in inventory/storage.
I think it is difficult for colleges to see the entire business situation on paper.
Again, my comments aren’t really me. I do not expect to qualify for any need based aid based on income. I am simply stating the problem can be severe if income is not high but there is an ongoing business with assets. I don’t really know the answer to the problem. I just know there can be a problem.
@Madison85 - Try to sell a law firm and tell me what it is worth. You will find out that professional service businesses have very little value outside the value of the assets.
In addition to what @twoinanddone has stated there are certain practice areas where firms have to be approved by the large corporate clients for ongoing work. That means our firm is approved. As soon as the firm is sold the new firm will have to get on the approved list. It isn’t always easy for the new firm to be approved, especially if there are conflicts between clients.
Law firms have little (to no) value beyond the value of the assets. The value of the firm is in the client list but the client list is only valuable to our firm. We have had lawyers unable to join the firm because their client list and our client list are incompatible. We have had to turn down some RFPs because of our existing client list. We get referrals from other firms because they can’t take some clients due to conflicts.