I finished The Everywhere Millionaire from economists Owen Zidar and Eric Zwick over the weekend.
And while the book probably isn’t for everyone—it’s partly a book about tax and economic policy—the authors provide some really interesting and actionable insights for small business owners.
Who Are the “Main Street Millionaires”?
Zidar and Zwick focus on a group they call “Main Street Millionaires.”
Their definition starts with rich households—those with at least $5 million of wealth—who own private businesses. And this turns out to be a surprisingly large group.
Roughly three million Americans fall into this category. Their average wealth? Zidar and Zwick say about $25 million. And because that mean average gets pulled sharply upward by extremely wealthy business owners, the median is presumably much lower—probably somewhere under $10 million. Like maybe $8 million. Or $9 million.
Think owners of construction companies, medical practices, restaurants, manufacturing firms and other often rather ordinary-looking private businesses.
To be sure, many of the anecdotes in The Everywhere Millionaire concern people who have become vastly richer than $25 million. Some are billionaires.
But the underlying population Zidar and Zwick study is much broader.
And while much of the book discusses the policy questions and challenges connected with this mostly hidden wealthy class, I think the research also provides some useful, actionable insights for small business owners—and for people considering entrepreneurship as an occupation.
Three things especially jumped out at me.
Insight #1: Entrepreneurship Often Produces Very Good Economic Outcomes
The first insight is probably the biggest one: Entrepreneurship often produces good economic outcomes. And entrepreneurship may be the only realistic path to a great economic outcome.
In the epilogue, Zidar and Zwick summarize what they learned from studying roughly eight million entrepreneurs starting businesses since 2000.
Income-wise, founders “substantially outperform” comparable people who don’t become entrepreneurs. And at the very high end of the wealth distribution, there are essentially “no paths to becoming a decamillionaire or centimillionaire other than creating, buying or inheriting a company.”
Here’s another interesting wrinkle: “Even founders who earned only the median amount among entrepreneurs tended to outperform their non-entrepreneurial counterparts. And entrepreneurs whose ventures didn’t work? They often exited and returned to the workforce.”
That’s interesting. And actionable.
It’s also not entirely new. Thomas Stanley and William Danko made essentially the same observation three decades ago in The Millionaire Next Door.
But Zidar and Zwick have something Stanley and Danko didn’t: massive amounts of longitudinal IRS data.
So we’re no longer relying just on surveys, anecdotes and the hunch many small business owners have had for decades.
The tax-return data appears to say the same thing.
Insight #2: Pay Attention to the Tax Strategies Economists Complain About
Zidar and Zwick criticize several tax rules used by successful private businesses.
That’s a fair policy discussion for another venue.
But if you’re an entrepreneur or small business owner? I think you can use some of their criticisms as signposts pointing toward the tax rules you especially want to understand.
For example:
- S corporation elections. An S corporation generally avoids the separate corporate income tax that applies to a C corporation. And with properly set reasonable compensation, some business profits may avoid Social Security and Medicare payroll taxes.
- Section 199A deductions. Qualifying business owners may deduct up to 20 percent of qualified business income, subject to a complicated collection of limitations. In effect, this can mean not paying federal income tax on the last 20 percent of qualifying business income.
- Deductible reinvestment. A business can often deduct expenditures made today to grow future profits and business value—while generally paying no current income tax merely because the value of the privately held business rises.
- LLCs and partnerships in estate planning. Closely held entities can provide flexibility for transferring ownership, structuring gifts and planning for appreciating assets.
I’m not going to dig into those strategies here. You can use the search box on this blog to find dozens of articles we’ve written about S corporations, Section 199A and other small-business tax planning topics.
But here’s the point: If economists studying wealthy entrepreneurs spend considerable time complaining about particular tax rules?
Take that as a hint.
Those are probably rules successful small business owners should make sure they understand.
Insight #3: Founder Exits Often Reduce Firm Profitability
A final insight from the book seems especially important for older business owners.
When a founder leaves a business—whether because of illness, death, retirement or a planned transition to new managers—the firm’s profitability often declines.
Not always, obviously.
Plenty of businesses successfully transition to children, employees, professional managers or outside buyers.
But the decline happens often enough in Zidar and Zwick’s data to make an important point: A successful private business may be more dependent on its founder than either the founder or the successor realizes.
Maybe the founder provides the sales energy.
Maybe she sets prices.
Maybe he makes the key hiring decisions, watches costs, maintains important customer relationships or simply pushes everyone to operate at a higher level.
Whatever the mechanism, founder dependence creates fragility.
And if you’re thinking about retiring, selling your business or turning the operation over to the next generation? That’s something worth spending some time pondering.
Two Quibbles with The Everywhere Millionaire
I’ve written about Zidar’s and Zwick’s research before. (Human Capitalists in the 21st Century.) And I think they’ve added greatly to our understanding of small business entrepreneurship in America.
But let me end with two criticisms.
First, as a small business advocate, I was disappointed that so many of the memorable examples of “Main Street Millionaires” were really extreme outliers—sometimes people with billion-dollar fortunes.
Those stories are colorful. I understand why authors use them.
But I would have liked more stories about the person worth $5 million or $7 million who owns the HVAC company, the manufacturing business, the dental practice or the restaurant group down the street.
That’s the entrepreneur the phrase “Main Street Millionaire” brings to my mind. And that’s the entrepreneur who seems most useful for the rest of us to study.
Second, as a tax accountant who works in some of the areas the authors criticize, I didn’t always think the book presented the tax rules with enough nuance.
Section 199A provides a good example. The deduction is not simply a blanket 20-percent tax break for wealthy business owners. Its mechanics include important restrictions involving qualified domestic business income, business type, taxable income, employee wages and investment in qualified property.
You can certainly argue about whether those rules represent good tax policy.
But those details matter when describing what Congress actually enacted and which entrepreneurs actually receive the benefit.
Neither criticism changes my view of the book’s central contribution.
The Everywhere Millionaire documents something small business owners have probably sensed for a long time:
Owning a successful private business remains one of the most powerful wealth-building mechanisms available in America.
And thanks to Zidar and Zwick, we now have much better data showing just how powerful that mechanism can be.
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