LLCs are a relatively new type of entity but are gaining popularity over the years. What is an LLC and what is it for? This is what Brent Buscay, the VP at Laughlin Associates, discusses with Athena Paquette Cormier in this episode. He starts off by defining an LLC and differentiating it from an S Corporation. Discussing LLCs in terms of the real estate industry, he also explains the difference between insurance and LLC. If you’re thinking of creating an LLC and do not know where to start then this episode is for you.
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Is An LLC (Limited Liability Corporation) For You?
I’m here with Brent Buscay. He’s the Vice President of Laughlin Associates. He’s going to be talking to us about LLCs. For full disclosure, I am a client of Laughlin Associates. Welcome, Brent. Thanks for joining me.
Thank you for having me.
Even though we’re doing this, I did meet you live and that was nice too. Why don’t you tell us a little bit about your background in Laughlin Associates to give us an idea of where you’re coming from and maybe what’s your background was before Laughlin?
My background before Laughlin was limited. I started in Laughlin in 1989. I worked for the founder as his personal assistant for about two years. I moved into the office as sales and marketing, then moved to Vice President a few years later. I’m providing entities and asset protection. My claim to fame is I formed over 50,000 entities that I have done personally. I have a little bit of knowledge in forming entities. I enjoy helping small business owners. Our niche is the small entrepreneur here at Laughlin. We try to provide a little more boutique service and hand-holding. There’s a lot of companies out there that think that they’re a big corporation and LLC mills that pump out entities. We’re a little bit more hands-on here. What kept it exciting is constantly hearing new stories and meeting new people.
That’s a long history with the company. Is the original owner still around?
The Laughlin’s father passed away in 1997. The son took over the company and he passed away in the late 1990s.
This company has been around a long time then.
We’ve been in business since 1972. It’s one of the oldest incorporation companies in the state of Nevada.
That’s pretty smart that you’re there.
Nevada has its advantages. It’s not for everybody but it does play a role and has some advantages for some people.
Why don’t you tell us what an LLC is?
An LLC is a limited liability corporation. It’s a relatively new company. When we’re talking about companies, corporations have been around for thousands of years. They date back to Christopher Columbus in discovering the New World. Corporations were formed to protect the merchants and the shipping when they were going out to explore the new worlds and to transport goods to protect their investors. LLCs started in 1977 in Wyoming. It was the first state to have an LLC. It was relatively unknown. Even though Wyoming started, it wasn’t advertised much. The IRS did not fully recognize it until about 1986.
It was a hybrid. We had sole proprietors, corporations and a lot of partnerships. A lot of the partnerships felt they were being left out. They weren’t afforded the asset protection of corporations but yet they didn’t want all the formalities that came along with running a corporation. That’s how the LLC was born. Delaware adopted it about 10 to 11 years later. Nevada, Utah and Texas followed shortly behind them. Those were your founding states in the LLC. LLCs are the preferred business entity in the United States now. Three out of five new startup companies that officially form are either LLC or corporation in LLC. There are some trends that are saying it might be 4 out of 5 now. People pick the LLC for its flexibility. It passed through right out of the gate. You form an LLC, register it with the IRS and it’s a pass-through entity. It’s an easy and flexible way to do business.
What does pass-through mean?
Pass through means that any revenue after your expenses flows through to you as an individual or as husband and wife. It flows through to you onto your personal tax returns. There’s not necessarily a separate tax return to do unless you change the taxation of the LLC. Out of the box, it flows through to you. If it’s passive income, it avoids FICA. If it’s ordinary income, there could be some FICA attached to it. It’s an easy way. We may have some rental income. We’re paying our mortgage, maintenance fees and property manager. The leftover income flows right through to us and we claim it on our personal tax return. With some of the new tax laws now, there could be some more tax advantages for that in that income at the federal level, which we’re starting to see. More and more CPAs are starting to understand it. Once we get past tax season in probably around the first part of May, we’ll start to see a lot of articles on how to enjoy some of those tax benefits in an LLC or an S Corporation.
What does LLC stand for? What do those letters mean?
Limited Liability Corporation.
What is the difference between that and an S Corp? People get those mixed up.
It’s a different entity. An S Corporation is a corporation. All corporations start out as a C Corporation. The S Election that we commonly hear is an election that we elect to the IRS to be a pass-through entity. Sometimes we hear some of the things like what’s the disadvantage of a corporation? We hear double taxation and things like that. The S Election was allowed in the ‘60s and it allowed a corporation to be a pass-through entity. There are some rules and regulations regarding the S Election. You can’t have more than 100 shareholders and you must be a US citizen. It took the corporation and allowed it to be a pass-through but they put a little bit of regulation on there that says only certain people can do it. If you’re a US citizen, small business, S Corporation functions like an LLC.
I guess someone would ask an attorney which one would be better or is that something you ask your CPA which one you should be doing?
When you get into the taxation, we can advise on our level what the proper entity is, the pros and cons. When it comes down to the tax benefits, that’s something that you should talk to a CPA about. Laughlin does offer free consultations with licensed CPAs for its clients. If you’re a Laughlin client, we do have CPAs that we work with. That would help determine for tax reasons, what is the best entity for us.
You would focus on the structure and what you need it for and the CPA would help you on the tax side to decide which one’s better.
Sometimes it’s simultaneous. Somebody comes to us and it depends on what the scenario is, but we’ll talk about real estate because the majority of what we’re seeing is the real estate and it is being formed. We were discussing the scenario of what we are trying to accomplish. We’re looking at purchasing a single-family home for our first venture. LLC is great for real estate for long-term hold. If you’re going to have a rental property, a multifamily unit and it’s going to be a long-term hold, an LLC is a great entity for that. Some hiccups can come in. Maybe it’s a property that’s owned by my corporation and I want to transfer it to an LLC.
There are some depreciation issues and things like that. We would bring a CPA in there. When you become a real estate professional, that passive income might not be passive anymore. It’s that earned income or ordinary income, so is an LLC still appropriate? That’s where we might work simultaneously with the CPA. We want to do this for asset protection, but we have some tax questions and play the scenarios out on what entity would provide the tax. Most of the time we’re not small business owners, we’re not worried about the tax as much. We’re looking for the protection of what the entity can provide us.
Does the LLC protect you or help you avoid probate or estate tax or anything like that?
The LLC does not help you avoid that. Usually, when we want to avoid probate, that’s when your living trust or your irrevocable trust is usually tied into it. The problem with LLC when I said it’s still relatively new is we don’t have uniformity with states on LLCs. Corporations are pretty much uniform across the board. States like Nevada have added additional protection, but the basis of it is uniform. Wyoming has added some additional protections to corporations and Delaware has. Usually, you can look across the board and they’re pretty uniform minus a few wrinkles. For LLC, we’re working to get them more uniform. There are some LLCs that are set up by a husband. In South Carolina for example, out of a standard LLC formed in South Carolina by a husband and wife. If the husband and wife passed away, the entity is dissolved. What would happen to those assets? They would go through probate, living trust, an irrevocable trust. Using different tools, we can help avoid that issue.
Do you need both to get it?
If that’s something that you’re trying to ensure that you’re not going to get stuck with a probate issue, it comes into play where we would want to tie a structure there to address that. That becomes your estate planning side of it. Let’s work on what is it going to do for us now, but let’s also prepare for the future or the what if.
Do you do family trusts or living trust?
Laughlin does not do it. We do strategies using them. We outline them but we work with an estate, an asset protection attorney out of San Diego that we’ve worked with for many years that fulfills those services.People pick the LLC for flexibility. It's a pass-through entity and an easy way to do business. Click To Tweet
Someone had a question, “Can you put more than one property in an LLC?”
You could put as many pieces of property as you want into an LLC. The discussion becomes, “What if?” The LLC doesn’t protect the properties necessarily. It protects you as the owner from the liabilities that the property could incur. If you have a rental property, the roof caves in and paralyzes or kill a renter, it would protect you from that action but it does not necessarily protect the property. There’s not a hard rule of thumb where you can say, “At this point, you need another LLC.” What is your risk level? What type of equity is in these properties?
An example would be if you had a home in Beverly Hills that was free and clear and had $3.5 million in equity, would you tie it up with a multi-unit in Compton that had $10,000 equity? Where you have multi-unit tenants now in a property that’s worth next to nothing, would you lump that in with that $3.5 million home and put that home at risk? At that point, that would probably be a wise decision to say, “Let’s have two entities. One for the low equity home and one for this higher income home.”
Are you saying that if you put those two properties in the same LLC and something happens at the multifamily in Compton, they can come after the equity in the Beverly Hills home?
It would be possible. Just because you have an LLC doesn’t mean that it cannot be sued. If something happened there, you sue the LLC and I’m not suing Athena personally. I have to sue the entity. There are some wrinkles in LLCs that charge order protection. In some states, it’s a lot better than in other states. Charging order protection says, “You can’t force us to liquidate the assets to satisfy this judgment, but when I take distributions from the company, you’re entitled to those distributions to help satisfy this judgment.” In California, the charging order protection is weak. You could end up with a judgment against the entity. At that time, you could be ordered to liquidate the assets of the LLC to satisfy the judgment.
In that case, you’re liquidating the house that has $3.5 million in equity. If you had it separated and the multifamily was sued and you had $10,000 or $15,000 in equity in that, what could you do? You can hand over the record book and the shares and say, “Here you go. Adios. I’m out of here.” It’s satisfying, but if you have another home there, you risk losing that. That’s the disadvantage of lumping them together. If you have 100 properties, which we have clients that do that, you probably know people that are in that type of range. Putting 100 properties into one is probably not the smartest. Do you want to manage 100 entities? That becomes its own process.
If someone’s starting their portfolio like the lady that asked the question, she’s starting off. She bought a house for $80,000 and she will probably buy another one for $120,000. At what point do you decide that there’s enough equity to where you should have separate ones.
A risk level. If you have somebody who is earning $50,000 a year and they’re brand new, they do get three properties. They’re out in Alabama. They get three turnkey properties for $30,000. Three in that property probably makes sense. If you had three entities, the added cost you’re making $100 or $150 a month in profit from the entities, you’re going to eat that up managing the three entities. At a risk level of when would it hurt or when would you not be able to recover and live the lifestyle that you’re accustomed to? A 25-year-old doctor has a lot of time to rebuild if something happened. A 65-year old person who has worked hard to get to that level of, “This is our retirement and this is what we’re going to do,” you’re probably not going to be able to rebuild. That might be a decision of, “Were going to separate these out.” There are other ways of protecting these assets. If you have them more lumped in, there are other strategies to protect it but you’re adding more pieces to the puzzle. That’s something that we talked about at our live events or we do on one-on-one as we’re trying to weigh what the risk is.
Some people say or some people believe that you don’t need an LLC. Getting lots of insurance will do the same trick. What do you think about that?
One, insurance companies stay in business because they don’t always pay out. If they can find a reason not to pay, they’re not going to pay. Two, it depends on where you live. If you’re in Missouri, you’re probably not going to see a judgment of $5 million or $6 million for some type of action. In your neck of the woods in California, that’s nothing. We see judgments against people, $5 million or $6 million all the time. What did that $1 million umbrella policy do for you? They’re not going to accept the $1 million. They see the assets are there and the ability to get it, so they’re going to claim that $1 million. The insurance company is not going to defend you. They go away and they come after your assets because of these judgments that are being awarded by the courts. California is a prime example of you see some ridiculous judgments and you shake your head of how can that be true?
I get that question a lot, so I thought, “Let me get that off the table.”
Just because you have an LLC doesn’t mean you shouldn’t have insurance. You should have both. What’s your first line of defense? It’s the insurance. What’s the second line of defense? The LLC. When you’re trying to settle a case, that’s a big negotiating tactic. They don’t know at the time when they’re suing what equity is available. If they do an asset search, usually most of us have some type of mortgage on the property. They can’t see the dollar amount and what that is. They do see that there’s a mortgage or lien on the property and you have this insurance policy. You’re not going to get after my assets, you’re going to be stuck with what’s in the LLC. Why don’t we end this now and take the insurance? It would avoid you going to trial and me going to trial. I don’t know if you’ve ever been sued, but suing somebody and going to trial is not cheap. Usually, at that point it’s a good negotiation tool, so double up your protection.
Is there anyone who doesn’t need an LLC?
If you have an operating business, you need a corporation or LLC. If you’re trying to make money from people’s transactions and you’re considering conducting business, you need an entity. If you are a landlord or own rental property, you need an entity. If you have ordinary income, it’s worth looking at an entity. Maybe it’s low risk but it’s not passive income. It’s ordinary income that could be subject to FICA tax. It’s worth looking at an entity, especially with what we’re going to see with these new tax laws. There are some personal service businesses, financial planners and stuff there. There could be some phasing of the flat 21% or 20% tax, but if you can be taxed at 20% on the first $175,000 versus maybe being in a tax bracket of 25% or 30% from that entity, it would be worth it at that time. Anybody who engages business with the public or rental properties, you must have an entity.
If you’re a salary person sitting at home, maybe you don’t need one.
The only case and you’re starting to see it in your neck of the woods in Southern California, a lot of employers are encouraging people to become independent contractors. I’m seeing that a lot. The entertainment business down there and some of these larger firms are paying for the entities for their employees to be independent contractors. The ability to have additional deductions that you’re not afforded as a W-2 employee. That would be a case, but if you’re a W-2 employee, you clock in and out, you don’t have a business and you don’t have rental property, there’s probably no need for it. Maybe a hobby could be something that there could be some advantages to having an entity.
We have a client who has a lot of rentals in Hawaii. He’s familiar with LLCs and has used them for years. He repairs custom and old cars as a hobby. People are dropping their cars off to him, leaving them in the garage, he’s fixing them up because he likes to and turns the car around to them and I said, “Why isn’t that a business?” He’s like, “Because it’s a hobby. Sometimes when I like them, we have such a great conversation and I do it for free.” I said, “If their wheels fall off when they’re driving down the street, who are they suing?” He’s like, “I never thought about that.” The funny story was he had something like that happened where he did connect a parking brake right. The car rolled down and it was a minor thing but they came back at him and asked for it, and he paid for it. He goes, “It’s never registered until you mentioned. Why not?”
What types of assets could people hold in their LLC? I think of it as real estate. Most of my clients are real estate investors, but what other kinds of things could you put in there?
Trading accounts, bonds and stocks. There could be some advantages to that. Predominantly what we see is they are being used for real estate or active running businesses. A lot of day traders will do it. There are some people that are using them as a holding company for other assets like stocks, bonds, antiques, things like that. They’re setting them up as a holding company. It doesn’t do business but they’re used to hold in some type of asset.
What’s the advantage of doing that with the antiques and whatever?
A lot of these people are using it for some tax write-offs. The entities are owned by an irrevocable trust or a trust. If they were sued personally, it’s not an asset of theirs. It’s an asset that resides in the entity that’s not owned by them. As beneficiaries or children as beneficiaries, it’s an easy way to pass those on and liquidate them. Maybe there’s some activity of trading artwork or things like that, where there’s some revenue generated so now the company can provide health insurance, retirement plans, solo 401(k) or self-directed 401(k) out of the company. They’re taking advantage of some of that type of stuff. Licensing agreements and sale agreements, maybe it’s holding a license agreement that has income coming into it. That type of asset can also be held in there.
I have another question here, “Do you recommend it as something people do to have an LLC for flipping houses?”
If you do a google search of that or you talked to 30 different people, you are probably going to get fifteen different answers. You can flip a house in an LLC. I would use an S Corp, but that’s me personally. Is that right? Probably not. Is it wrong? Probably not. The reason I would lean to an S Corp on that is if I’m flipping houses, I might be hiring subcontractors. I maybe have employees out there who are bird-dogging and finding me properties. I’m using other people that could be tied to me. I like the protection of the corporation a little bit better because there are many cases that the corporation in that aspect would protect you a little bit better. Also, it might not be considered passive income. I could use an S Corporation to get a reasonable salary and take the rest as a dividend and save half of the FICA tax on the dollars that’s in the LLC.
The argument against that too is you can make the LLC an S Corp if that was the case. For me, I like S Corp. I think of a little bit more protection. We’re engaging with the public and we’re hiring subcontractors. There’s a little bit more activity. I’m assuming the person who’s asking this question is probably a single-member LLC, maybe a husband and wife. It’s not to knock single members because if structured properly, they’re great. It’s just there’s no argument if I was using an S Corp. It takes me how to explain or defend the actions of it. That’s a personal opinion, but it’s not wrong to use an LLC.
What do they mean when they say, “Pierce the corporate veil?” Someone asked a question about that. They were told that the LLC is not worth anything because they could pierce the corporate veil anyway. What does that mean?
Corporations and Limited Liability Companies or LLC provide you personal protection. What does that mean? If the entity is sued, whether it’s a corporation or LLC, you must sue the corporation and LLC. You can’t sue the stockholders or the members. Predominantly there’s a variety of ways to pierce the corporate veil. LLCs would be a little bit easier than corporations, but if we’re going to be afforded the protection of these entities, doesn’t it sound too good to be true to say, “I paid California $105, I filed this paper and all of a sudden, I’m magically afforded all this protection?”
It does sound great.
That’s what most of us think. I went to California, I paid them their $105 and I have all of this instant protection. Corporations are required to do formalities. You must hold annual meetings and officers and directors must make decisions for the company. “We’re going to purchase a piece of property,” you do a resolution. “We’re going to make dividends. We’re going to issue shares. We’re going to enter into a lease.” It sounds crazy when it’s only you, but you’re putting your different hats on. The directors are telling the officers to go do this. You formally document that and that’s what separates a sole proprietor from a corporation. It’s because you’re doing these extra steps.
LLCs predominantly aren’t required at the state level to do those. If you do those in the LLC minutes resolutions and you are acting as an LLC as a separate entity from you, that is how you avoid the corporate veil from being pierced. Another thing you want to remember is commingling. You should have two checkbooks and two credit cards. If the LLC is purchasing something for a rental property, it should be using its credit card to purchase that toilet to put into the house. If it hires a contractor, it should write a check from its own account to the contractor. I should not be taking my LLC checkbook and paying for my trip to Hawaii for my family vacation.
That is where people get into trouble. You have the Alter Ego Doctrine. That’s the set guidelines of what it takes to pierce the veil. An alter ego means that there’s no distinct separation between you and the entity. If you can keep that separation, you can document it and prove it in court. You will be afforded and you will not have the veil pierced. The main exception is fraud. If you commit fraud, the corporate veil is going to be set aside and they are going to be able to step up from the entity whether it’s an LLC or corporation, take those and go after those assets, as well as go after you as the owner of the entity. Fraud takes everything off the table.An LLC doesn't protect the properties necessarily. It protects the owner from the liabilities that the property could incur. Click To Tweet
It’s not piercing the veil it’s ripping it all off.
Nevada is the best state to protect from piercing the veil. I was doing a little bit of research to check the number. There have been three known cases in Nevada of the corporate veil being pierced over the last 40 years. It was well-over $2.5 million entities and they were all due to fraud. That’s three cases for fraud.
Someone asked me and I don’t know if you can answer this, but what are the best states to form your LLC and what are maybe the worst states?
The best states to have an LLC or a corporation would probably be Nevada, Wyoming and Delaware. Does that mean that it would fit for everyone? No. We could talk about this because probably everybody that’s on here and you and I hear it all the time, “You should have a Nevada company or a Delaware company. We should do it.”
We’ll stick with Nevada because that’s where I live and I love Nevada. I’m partial to Nevada. If I’m a California business owner, I have a store and employees in California, I do business in California, can I form a Nevada company? Yes, I can but California is not going to want to lose out on their taxes and there has to be the jurisdiction for the actions of this company. By law, the Nevada company must register to do business in California. It goes to the Secretary of State in California. It files articles in there saying, “We’re a Nevada company. We want to qualify to do business in California and by the way, we agree to follow California laws.” We’re sued in California Court and we’re going to follow California law, not Nevada law. Could you still do it? Yes. Could there be some advantages? Yes, but for most people, the advantages go away. If it’s an operating company, it probably doesn’t make sense.
Let’s say you’re a real estate promoter. You’re traveling the United States doing real estate seminars or whatever it is all over the United States. Could you have a Nevada company and register it in California, because that’s where you live and have some tax advantages some protections? Yes, the Nevada company for anything it earns from the other states goes into Nevada. There’s no state tax. The California portion for anything that you do in California is taxed at the California level and done that way. There are some scenarios there and there are strategies where Nevada can come into play maybe for ownership, leaning assets, licensing agreements and for distributions where you have legitimate actions of why it needs to be here and how it can play in with a company like that.
I’m a real estate investor and I have property out of state. Do I have to have the LLC be registered in the state where the property is or can I have a Delaware company own a Florida property?
Any corporation or LLC in any state can own property in any other state. If it is considered doing business in that state like collecting rents, it must qualify in that state. If we’re going to be honest, we’re following the laws and we want to do it correctly, a Nevada company that holds a rental property in Missouri, Alabama, Tennessee or Florida should register to do business in that state. A longtime client has owned a piece of property in Missouri in his Nevada entity for the last 25 years. Missouri found out and he wasn’t aware of this, that it was a Nevada company collecting rents for the last 25 years. They told him that he must register in Missouri. There were no penalties and fines, “You must do it.” He called us and said, “I got this letter. They’re saying I need to do this. Is this true?” I said, “It’s true.” He’s like, “In 25 years, I never knew and nobody ever said anything. They’re not asking for anything.” He must do that. If that was a Nevada company doing it in California and they found out, they wouldn’t be okay with only doing it. They could go back and ask for some back penalties, fees and things like that. We always tell everybody if you can use Nevada or Wyoming, there are still some advantages to it but qualify it to do business in that state or go ahead and form an entity in that state.
That’s a great clarification because that’s what I hear a lot too.
There are other people out there that are promoting it and misleading people who are not bringing it up, “We’re not going to say anything about it and if you don’t ask, we’ll continue along with this because that’s how we make money.” We don’t operate that way. We try to disclose as much as we can. If we don’t know the answer, we’re going to find somebody who can provide a real answer for you so you’re making the right decision.
If I live in California but my properties are in another state, I’m not having to register them in California because the income is being generated in that other state.
That’s for a tax professional that we should probably bring somebody on. Let’s try to simplify it a little bit. Let’s say smaller investors, newbies, people who are using that income to better their life where they live. We’ll stick with Missouri because it’s been popular. We have a Missouri LLC. It earns $20,000 a year and I’m using that money. That money is coming to me and going on to my personal tax return. I’m taking it in and I bought a new car and we remodeled our house. Where’s that money going to be taxed if you live in California?
It will be taxed in California. There are some exceptions to that but the rule of thumb is if you live in that state, that’s where you’re directing the business. What’s California going to say? You own it. You’re calling the shots from here in California and you’re benefiting from that. There are exceptions and ways to reduce and eliminate that but under the general guidelines, it’s going to be taxed in your own state.
Someone could ask you about that. If they did a consultation or something with you, you could troubleshoot that with them.
We could troubleshoot that and point you to a tax professional to make the final determination that it’s going to work for you. In some cases, ask for their advice on what we can do maybe to reduce the hit on this. It’s a different level to have somebody who is not using that money, they’re not having the LLC be a tax pass-through. Maybe it’s an LLC taxed as a corporation or a corporation that’s doing it in that state and they’re not using that income. There are some things you can play around there. That’s an individual scenario of everybody’s going to be different from what that money doesn’t and where it goes.
In general, how long does it take to create an LLC from start to finish? How long does that take and what’s the process?
Every state is going to be different. A general rule of thumb is about fourteen business days. There are a few states that run 8 to 16 weeks, but it’s far in between and almost all states now offer 24 to 48-hour turnaround. Most of those states are minimal to get that type of turnaround. Arizona is a bad state. It’s 10 to 12 weeks, but it’s $25 to have it in 48 hours. Why wouldn’t you pay the $25? To form a corporation or LLC, we file articles. I like to say that those are the state fees. That’s how you pay the state to do this. What do we put on the articles? The name of the company, what we want it to be named, what type of entity is it? Is it going to be a corporation or an LLC? Some states don’t ask this but some states do. Where’s the principal place of business? Where is the mailing address that if we need to mail you something, where do we where we mail it? Some states will ask the LLC who the members or who the managers are. Some states don’t. In a corporation, some states will ask who the initial director is.
It’s a simple form that’s filled out. You have to pick sometimes what type of entity, if there are any special considerations, corporations, how much stock and what the value of that stock is. That form is filed at the state. That form is kicked back to you with usually a nice little certificate that says, “You are a California or an Arizona LLC.” From there is when you have to start putting the rest of the pieces together. You’re recognized at the state, but are you a real business? Are you legitimate? Would this hold up in court? No. The bad thing about this as most people don’t know that and all they do is file articles with that stake and they’re often running. We see many times that they’ve never even got a tax ID number for the entity. They’re using their own Social Security number. That’s bad.
LLCs have operating agreements. The state doesn’t provide them. Firms like us, attorneys prepare the operating agreement and if it’s a corporation, its bylaws. Those are the instructions of how it’s going to be structured, who the players are and the rules of how this company is set up. Predominantly, we use what we would call a Boilerplate Operating Agreement or bylaws that are state-specific, so they meet the requirements of the state. We do that due to the fact that it gives you the flexibility of changing entity. We might have an entity that’s holding a simple single-family home. We sell that home. Why shut down the entity because we had a custom operating agreement drawn up to hold this piece? You can repurpose that entity if you want for additional property. Maybe you’re tired and you realize you’re not going to be a landlord anymore, “That’s not what I want to do. I want to get into the note world or expand.” It gives you the flexibility of not having to either form a new entity or going back and paying thousands of dollars to have it redrafted.
Once that’s in place, I talked about the federal tax ID number, all LLCs and corporations have their own tax identification number. That is how it’s taxed and that’s how it’s recognized by the IRS. All entities must issue ownership, so if it’s an LLC, it must issue membership shares. If it’s a corporation, it’s going to issue stocks. I could tell you probably 85% of people I talked to have never issued membership shares and stocks. It’s another piece of the puzzle that shows true ownership. You can walk up and hold that stock in your hand and show, “I owned it.” You go back to the records of the book and you can say, “I paid $1,000 for this. I capitalized the company with $20,000. I’m providing my expertise in the real estate world in exchange for this. I’m the master widget-maker and I’m given the expertise to receive that.” That’s another piece of the puzzle. What are the dividends? We don’t think about that. That should be documented if you’re going to take dividends or if you’re going to take a distribution.
Do you take a distribution or receive a distribution?
This goes to the Alter Ego Doctrine piercing the veil. I come to you and you have a nice commercial building that I want to lease. Maybe you do your due diligence and you ask for a balance sheet or something from me and I show you this fancy balance sheet and you lease the property to me. As soon as you do that, I go and take $100,000 distribution out and there’s no money left in there. I don’t make my payments to you. In some states, what’s the eviction process? It’s long. How long did it take to evict somebody from Illinois?
I purposely pulled the money out, so what could you say at that time? We’re going to claim the Alter Ego Doctrine and go after my personal assets. Before we engaged in this, I had a written document. It changes yearly or it changes whatever I want. That document states that, “For my services, I’m going to take a $90,000 distribution or any remaining profit that’s left in the company minus operating expenses.” We can show that to a court or somebody and say, “This was predefined. This is what I get paid for doing this service, so I didn’t do it to defraud them. We came across hard times. My vacancy was at 90% occupancy now I’m at 30%. I do not have the income.” It can help keep the veil from being pierced. Those are all documentation that most people don’t do or are told they don’t have to do. In some cases by law, you don’t have to do it, but the IRS has different rules. Court has different rules and judges like to make their own rules.
You’re using the toughest rules so that you’re protected at all stages.
We try to promote that let’s take it as far as we can, overdocument and overprotect, so we know that the federal IRS state level has no doubt that this company is sole and separate from me and it is operating like that. I don’t know if everybody’s familiar with the corporate record book. To be able to pull out your binder, open it up and say, “Here are my articles, my operating agreement, membership certificates, membership ledger and all my documents for this business decision.” Handing that book over and having somebody flipped through it a lot of times will end any discussion on an IRS audit.
What does an auditor have to do? He has to find something. That’s what he’s there to do. Handing that book over and there’s the resolution for that company car. Also, resolution saying you’re going to reimburse for personal mileage or for the home office and stuff. By handing that over to the auditor almost always is a sign, “They have done what they need to do and why don’t we say, ‘It looks like you didn’t pay sales tax on these three items. Let’s call $100 here.” They win and they go back and they get to check on the box that I won an audit. It’s $100 not having the last 3 or 5 years of your leased vehicle disallowed as a business expense or something. That’s where the formalities come into play.
Are there any times or any case that you could say that someone missed a goal where they set up a corporation or an LLC and they didn’t keep the records? Have you heard of any problems like that?
We see it all the time because we don’t always form entities for people. We also provide a corporate veil protection service, where we go back and help you reconstruct and put in place the pieces that you’re seeing. As I said, 85% to 90% of anybody that comes to me and says, “I have an existing LLC,” we’re going to find something. If I came down to any of your friends that have an LLC or corporation and we started going through what they have and don’t have, we almost always find something. One of the big things we hear is, “My CPA does it.” Your CPA prepares your taxes. They don’t do minutes resolutions and they don’t do that requirement. “My attorney does it?” Most of us don’t have an attorney.
There’s a guy that we pay $300 or $400 an hour when we need to talk to them and we probably paid him $2,000 to set up our entity. That’s what he did. He set up your entity and he filed it with the state. Most likely, he called us and purchased the operating agreement or the bylaws. There are your entities. He’s not doing those formalities, unless you’re calling him constantly and having him bill you $300 to $400 an hour to do that. Most attorneys don’t want to do that. Collecting $250 to talk to you to have their paralegal perform it, that’s not what they’re looking for. They make their living on higher-end stuff. They want to do the stuff that makes them a lot of billable hours. There are exceptions, I’ve seen it but it’s not the norm that they’re maintaining the book or you’re protecting your company as you should.Insurance companies stay in business because they don't always pay out. If they can find a reason not to pay, they're not going to pay. Click To Tweet
For people who have an LLC, you would be able to help them catch it up.
Anybody who has an existing LLC or corporation, we have a program designed that we help them catch it up and recreate the documents that should have been there. We don’t backdate. There’s a difference. If there’s not an Operating Agreement, provide the Operating Agreement. If there are no shares, provide the shares. We go back and reconstruct them. When we form entities, we include it in the cost of the entity. Most other companies, you see these $99 incorporation services, they don’t provide that level of service. They charge you state fees plus $99 for taking that piece of paper to the state and return it to you.
You also have a maintenance program, which is what I signed up for. Whenever there’s an activity that the LLC did, you help us to keep our paperwork up to date.
In that program, we go back from the beginning of the formation and we bring it current. We work with you throughout the year to continue to keep it. We try to make sure you’re called regularly and we do an interview because a lot of people will be like, “Have you done anything?” “No, I haven’t done anything. I haven’t bought a new house but I leased the building.” We try to do an interview and provide that documentation. We create it for you, email it to you, you sign it and put it in your record book. If you don’t have a record book, that’s one of the first things that we do for you. We get you the record book, where you have the proper place to store that to make it easy to find.
If someone wanted to talk to you about their own situation, how would they get ahold of you to do a consultation?
There are two things that I’ll do for your group. We have a seminar in San Diego.
What’s going to happen in that event?
We’ll do a three-day course. We will cover the basics of what is an LLC? What is a corporation? How do you use it? We will spend the first two days going in preparing you if you have a lot of assets, you have a high liability business, how to take it to the next level to protect you and your family and to protect those assets. One of the things we didn’t talk about is a lot of times we form these LLC or corporations to protect us from liability. How are we protecting the corporation from us? What if I’m personally unrelated?
We covered that. That will be something that’s covered there. I mentioned that we have somebody who does trust and things like that. Kevin Day is the person who does that for us. Kevin and Arnold Goldstein are the ones that brought the modern trust to the United States using provisions that were overseas for thousands of years. They brought it to the United States. They helped write the federal law, wrote books, seminars and trained other attorneys. We do have the best estate planning and asset protection attorney at our events. We have other opportunities. We have CPAs and financial advisors that are all there at no charge while you’re there for one-on-one consultations.
We have some wealth growing opportunities and different vendors if you’re looking for turnkey rentals and notes. They’re some money-making opportunities and networking. Get to talk to other people who’ve been there and done that, people who you could be a mentor to. Maybe they’re getting started and you’ve already done it, so there’s some mentorship. It’s good for networking. It’s a great three days. I can tell you we have never had anybody say it was a waste of time. We are asking you to come and sit down for three days. It’s an investment so that’s something for your group.
Another thing I will do for you is I will personally do 30 minutes one-on-one with anybody that wants to call me. The phone number is 1-800-648-0966. You can ask for Brent. If you get my voicemail or I’m not available, leave me a message that you attended Athena’s event and I will get back to you. I am in the office Monday, Tuesday, Wednesday. Thursday, Friday, Saturday, Sunday, I am heading to Florida for an event. I’ll do a personal 30 minutes consultation for your attendees.
I know Brian’s going to be excited about that. Thank you so much for joining us. Are there any final thoughts that you have?
All I can say is if you’re not sure where you’re at, it’s only 30 minutes. I promise you, I’m probably one of the least salesy person when it comes to this. I’ll give you good solid advice or point you in the direction if I don’t know. I have a lot of experience in this. I can tell you tons of real-life stories of why you should do it. I can’t count how many people we have these conversations with. I’m talking not just the normal person who’s going to lose $10,000 but people who are like, “I don’t need this. I have umbrella policies.” We’ve had detailed conversations. We blueprinted out. They call back 1 or 2 years later, “Brent, the check is in the mail. We’re ready to go now.” I always know what happened.
Why the big change and the rush all of a sudden?
“We were sued.” The problem with that is the real answer is it could be too late. There are still some things we might be able to do, but usually it’s too late and you’re going to have to go through it, lick your wounds and learn. If there’s something that you think you should be doing or you know you should do, do it. When we’re talking about formations, we’re not talking that much dollar. An LLC on average, if we took all 50 states, that’s probably $1,200 on average and having us manage you for the first year and do all the work for you.
If anyone has shopped around for a trust, LLC or even these internet things, you are a good value. I couldn’t believe it. I’m excited.
I appreciate you for having me. I’m available if anybody wants to talk.
Thank you so much, Brent, for joining me.
Thank you for having me.
Thank you, everyone, for joining us. In the next episode, please join us to hear Bill Exeter, CEO of Exeter Exchange Services, about deferring taxes maybe forever on the sale of your property. He’ll be talking to us about what a 1031 Exchange is. He’s been in the business for years. He’s always a joy to have. If you own property and you’re thinking of doing an exchange or wonder if you should sell, it’ll be a good call to be on. Thanks for joining me. I’ll talk to you soon.