Join Ken McElroy and Rich Dad Advisor, Garrett Sutton, as they break down various types of company structures, asset protection, and how to best set your real estate investing business up for financial success.
Ken McElroy:
Hey everybody, it’s Ken McElroy. I’m here with Garrett Sutton, my good friend and fellow rich dad advisor. Uh, for those of you guys who might know, Garrett is an attorney he’s based in Nevada and he does a lot of work for us on asset protection. So we get a lot of questions around asset protection and, you know, when people buy their real estate, what they should do with it. And so who better than to bring Garrett on the show and kind of walk you guys through some of the different structures and things at welcome Garrett.
Garrett Sutton:
Good, good to be with you Ken, for sure.
Ken McElroy:
For sure. So, um, why don’t you give a little, a bit about your background, just so everybody can kind of get a flavor for what you do cause I know you do thousands and thousands of LLCs and other things.
Garrett Sutton:
Yeah. Well, I went through Robert Kiyosaki’s favorite school, the university of California, Berkeley. Uh, he, he never lets me forget that. Uh, and I studied business administration and went across the Bay to, uh, Hastings college of the law in San Francisco. And, you know, I practiced corporate law in San Francisco and Washington DC, and I just kinda got tired of the big city and I liked to ski. So I moved up to, uh, Reno, uh, back in 1989, uh, before all the other California and started moving here. And, uh, it’s just been great. I’ve raised a family and, uh, built a business and, uh, became very fortunate to become associated with Robert and you and the rest of the rich dad advisors. And it’s just been really rewarding to travel around the world, preaching financial education. And my part is, as you mentioned, Ken, you know, as you start building up your asset base, you need to protect your assets at the same time. And so we set up corporations and LLCs for people to do that.
Ken McElroy:
See, now, man, I’m like, everybody’s super sensitive about everything and, and uh, you know, quick to judge quick to sue, and I know it’s gotten worse over the years, so let’s talk about the, you know, cause it, you know, to somebody who’s not, you know, a legal ease, right? They don’t understand, like there are lots of different structures. I get this question. I’m not even an attorney. You know, what kind of entity should I put my stuff into? So can you talk about the four different types of business structures, you know, and why you would use each one?
Garrett Sutton:
Well, the one, the one way you don’t want to go is to take title to anything in your individual name. All right. If a tenant sues, they have a claim against you as an individual and they can reach all of your other personal assets besides the equity in the property they’re suing over. So we don’t want to take title in your individual name. The government provides us with good entities to use. And, uh, the, the, the number one entity these days can, is the LLC the limited liability company. But you also have the limited partnership, which has its merit. If you want to keep control of things, um, you also have the S and the C Corp, uh, you’re not going to use a corporation to hold real estate tax wise. It’s not as favorable with the LLC and the LP. We have better asset protection, but those are really your four choices with the fifth choice of taking title in your, in your individual name, being the worst. So you’re going to use one of the four.
Ken McElroy:
So I, I had a friend of mine. I was telling you that I think once, uh, he, you know, he ran a red light and he had a family in his car and he hit another family. And luckily, no one was hurt badly, but some people were hurt. Um, and they, uh, you know, who the people in his car and the people in the other car sued him and, uh, his insurance policy for his car, you know, obviously blew right through that. And then they started going to his assets personally. So they started going after his real estate holdings, his assets. And that’s when he was like, Oh my gosh, like, I don’t have anything protected. Right. That’s basically what you’re talking about. Right?
Garrett Sutton:
Absolutely, Ken. I mean, if you get in that car wreck and title to the properties is in your individual name, that’s fair game for the victims of that car wreck. So we always recommend that you have an umbrella policy of liability insurance, right? With your home and auto in the same with the same company, you get that extra million dollars of coverage for $400 a year. So you have plenty of insurance money. Then you have all your other assets, your real estate, brokerage account, even gold and silver in a separate LLC. And the attorneys are going to have a very difficult time getting at those assets if you properly structure everything. So an umbrella policy of insurance and then LLCs and other protective entities,
Ken McElroy:
Really good advice. I know a lot of people don’t do the umbrella as well. They just get the basic, and, and I know from personal experience, what happens is they, if your assets are in an LLC, as an example, then the attorneys have to actually Sue that LLC. And then they have to do, what’s called. They have to Pierce the corporate veil. That’s really, really difficult, right?
Garrett Sutton:
You don’t see it happen that much. It is difficult, especially if you set up an, a good, strong state like Nevada or Wyoming, it’s very difficult for someone on the outside attack. Someone who’s been in a car wreck. It doesn’t have anything to do with the real someone suing from the outside to get inside that LLC, if we structure it properly with, for example, a Wyoming, LLC is the holding entity. It is really difficult. So you have enough insurance, the attorneys know how to get it. The insurance having that umbrella policy for $400 a year, they know how to get that. They’ll leave you alone with your LLC.
Ken McElroy:
Yeah. In fact, a lot of times what I’ve seen them do is they actually see how much in church you have. And that’s what they sue actually, they sue to that point because they, they realize, trying to pierce, you know, into those corporations is, is a massive legal battle because you’re going to push back.
Garrett Sutton:
Right. And so they know that and, you know, getting through the corporation to reach the D the money inside an LLC, uh, it’s easier in California, New York, Utah’s pretty weak. So we also want to pay attention to what state we’re setting up in. Uh, Nevada, Wyoming, and Delaware are very strong States for that.
Ken McElroy:
It makes them strong, you know, cause I’ve heard you talk a lot about this and you know, the choice of state. I know that there’s a lot of difference in costs as well on, you know, the, the annual filing fees and stuff like that. But what makes one state stronger than another?
Garrett Sutton:
Well, it’s interesting Ken in most countries, the corporations and LLCs are governed by the national government, right? And in the United States, after the American revolution, they didn’t like the idea of these corporations having too much control. So they went state by state. And so now we have States competing against each other to be the best state. And that would be Nevada, Wyoming, and Delaware. And those States have said, we have the strongest charging order protection, which is a key asset protection feature. We’ll give you the strongest charging order protection. And we’ll even extend it to a single member, LLC, a one owner, LLC, not every state does that. And so you want to set up in a state that has really strong protection
Ken McElroy:
Charging order is, uh, an actual judgment, right? It’s like, let’s say you lose. Then there’s a charging order against that, LLC. Is that right?
Garrett Sutton:
Yeah. So you get in the car wreck and they get a judgment against you for a million dollars. You don’t have it, but you have your assets inside a Wyoming, LLC. The charging order says, unlike California, you can’t barge into this LLC and sell the asset. You have to wait until the LLC makes distributions. And the attorney who on a contingency fee, you know, he only collects when there’s payment. He has to monitor that it’s not a good use of his time. He’s better off going for the next insurance policy. So, you know, having these structured properly is a really great deterrent
Ken McElroy:
By the way, guys, most of these are contingency lawsuits, which means that you can go anywhere you want and say, Hey, this happened to me. And that attorney is going to take it on contingency, which means that they only get paid a percentage of the judge.
Garrett Sutton:
Right, right. It’s and it’s kind of a fair way. I mean, someone who gets in a car wreck and he doesn’t have much money, can’t afford to pay an attorney out of pocket for every hour. So the attorney says, look, I’ll take your case. And I’ll, I’ll keep 35% of what I collect. And you know, that’s just kind of a fair way to go, but you have contingency fee attorneys out there who go beyond that and Sue on other types of claims at all. So we just need to be aware of the system and use the strategies that the governments in every state give us to protect ourselves. Every state has LLCs. Every state is willing to protect its investors so that they will invest more money in the state can collect more taxes. It’s really that simple.
Ken McElroy:
So we’re going to take a quick ad break Garrett, and one, we’re going to break down after we get back, we’re going to break down the LLCs corporations, sole proprietorships, and the one that is right for you. Well, we’ll be right back with Garrett Sutton right after this. [AD BREAK]. Okay. Welcome back. Welcome back. So we’re here with Garrett Sutton, you guys, and obviously he’s an attorney and he can talk about the different, we just got done talking about the different types of business structures. So Garrett, how are all these businesses structured or how are all these business structures taxed differently? Cause I know that’s one of the things that a lot of the people are concerned about is obviously the tax piece,
Garrett Sutton:
Right? And so can the LLC is the best. You can have the LLC tax, however you want. It can be a disregarded entity, meaning it flows all the tax obligations flow onto your personal return. You don’t even have to file a federal return. If it’s a single member, disregarded entity, which can be husband and wife through their trust, it can be taxes and escort. If you want to go that way, it can be taxed as a C Corp. Or if you have multiple partners, it can be taxed as a partnership. So with the LLC, you can get whatever tax it, uh, structure that you want. The limited partnership is taxed as a partnership. The S-corporation is taxed as a flow through. So there’s no tax at the corporate level. It flows through like an LLC or a partnership. And then the C Corp is the one that has the double tax. The C Corp will pay tax on its income. Currently it’s 21% then distributions flow through to the shareholders and you pay a second tax. So that’s the problem with the C Corp. For some people it’s a double tax entity. Um,
Ken McElroy:
And a lot of people, you know, they don’t know the difference that I see. I see these people, they put these assets in the C Corp. So I’m like, why are you paying double tax? It’s so simple because it’s paid, as you said, at the corporation level and then at the individual.
Garrett Sutton:
Right. And a lot of people can, as you know, there’s a lot of misinformation out on the internet and you see people say, have all your real estate ultimately held by a C Corp. That makes no sense to me. That’s, you’re just paying way more in taxes than you need to.
Ken McElroy:
Right. And so how does somebody, you know, cause it’s confusing, Garrett. I mean, even I’ve gone on the internet. I mean, obviously I use you, but, but I go on the internet and I’m like, there’s like all these people out there trying to get people to, uh, you know, sign up on all these different things. What are some of the things that they should be?
Garrett Sutton:
Well, I think you want to deal with someone who’s an attorney who’s reputable, uh, you know, some of these companies come and go, uh, and if, if you rely on them and they’re not going to stand behind their work, um, I just wouldn’t go that route. I mean, you know, we’ve been in business for a long time. We take care of our clients, but you know, the people on the internet that are going to give you this information when they’re not an attorney or not a CPA, um, I would be just really cautious of that because I I’ve seen the horror stories can, I mean, people come to us and they have, uh, relied on people to set them up. And it’s just a mess at, at what they have gone through and how we have to unwind everything.
Ken McElroy:
And if you guys want more information, you know, you can go to, uh, get Garrett’s book on RDApress.com and you can snag it on there. He has the greatest book start you on corporate corporation. I see it’s over your shoulder there, Garrett and the loopholes are real estate. Those are two great books for 20 bucks. You guys can get educated on some of this stuff. It’s certainly something that you should be doing if you’re getting into this at all. And how do people get ahold of you as well?
Garrett Sutton:
Well, they can go to corporatedirect.com and we also offer a free 15 minute consultation with an incorporating specialist to see if we can help them. So feel free to call it’s 800-600-1760 or corporatedirect.com.
Ken McElroy:
Great, great. So now we’re going to hop over to our premium page for some bonus questions.
Ken McElroy:
About why you’d want it an LLC tax as an S Corp. If you’re not a premium member, go to KenMcElroy.com/Premium And sign up. All right, guys, don’t forget to go to Garrett’s page. Don’t forget to go buy his book at RDApress.com. If you want more information again. Thanks for listening.