A best-selling author, speaker and a member of an elite group of “Rich Dad’s” advisors, hand selected by author Robert Kiyosaki, Garrett speaks to investors and entrepreneurs on a variety of topics including asset protection, liability limitation, wealth creation, as well as various business and real estate issues. As an advisor for Robert Kiyosaki, Garrett has authored Own Your Own Corporation.
Garrett’s books provide an accessible source of information for building your own success. A member of the State Bars of Nevada and California, as well as the American Bar Association, Garrett attended Colorado College and the University of California at Berkeley where he received a B.S. in Business Administration in 1975. In 1978, he graduated with a J.D. from University of California’s Hastings College of Law in San Francisco.
Beyond his desire to educate people and business in wealth protection and growth, Garrett serves on the boards of the American Baseball Foundation, located in Birmingham, Alabama and the Nevada-based Sierra Kids Foundation.
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ANNOUNCER: Welcome to Creating Wealth with Jason Hartman! During this program Jason is going to tell you some really exciting things that you probably haven’t thought of before, and a new slant on investing: fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self-made multi-millionaire who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it! And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.
JASON HARTMAN: Welcome to the Creating Wealth Show! This is your host, Jason Hartman, and this is episode #371. Thank you so much for listening. We’ve got listeners in 154 countries, at last check, so we appreciate you listening from all around the world, and it is just so heartwarming to see, when I look at a map, you can actually go in and look at the map of where in the world people are listening from, based on their IP address. And it is amazing! It is amazing, the kind of reach one can have nowadays with a podcast. And if you’re interested in that, by the way, listen to my Speaking of Wealth show, because I talk to successful podcasters all the time, and infopreneurs, and things like that; people that are working with interesting Internet marketing models, and so forth, and that’s at www.speakingofwealth.com, or of course on iTunes, and I just wanted to mention that. I have a whole list of other shows that I do, but this is the most popular one, the personal finance and investing, financial security show, and that’s what we’re gonna keep doing as well. But, just a side note on that.
So, thank you so much for listening, and gosh. Today. We are gonna do something kind of neat, and kind of special for you. And that is, we’re going to take something that was posted in the members section, and it was posted years ago—it’s been there for a long time, so, if you are a member, you’ve already heard this episode, possibly. But it is that interview that I think is very important, where we talk about asset protection, with Rich Dad Advisor. He wrote a couple of the Robert Kiyosaki Rich Dad books, and that is Garrett Sutton. He’s a fantastic attorney, he’s got some great advice on asset protection.
And you know, at our Meet the Masters event last January in Irvine, California, we had about, I don’t know, a hundred people in the room with all of our people that flew in from all over the country, and a few from different parts of the world. And it amazed me how many people struggle to really understand the way to use legal entities and legal structures, and of course, I need to make the disclaimer, I am not an attorney. That’s why I rely on experts for tax information, legal information, and business information, in many forms as well. But, you know, there’s the concept in asset protection of the internal threat, and the external threat. And Garrett Sutton, who you’re about to hear, is the person who really made that clear and understandable for me. Although I had read things about asset protection over the years, and heard various attorneys speak about it and so forth. This internal and external threat concept is a critical part of it. Very important to understand.
So, you’re gonna hear about that in this interview here in just a few minutes, but one news item that I wanted to bring to your attention, when we look at the global scene. And that is Greece. Greece is one of these countries that has struggled with socialism. And they’ve had to institute all sorts of austerity measures, and the entitled people in Greece feel that that’s unfair that they shouldn’t be able to retire at age 47. I know. That’s ridiculous, isn’t it? Well, anyway. This is a tragic thing. The Bank of Greece was actually bombed just a couple of days ago, and that was right before, just a couple of days before a landmark bond sale. And from Newser, there’s just a little article, I’ll paraphrase it for you here. Because this holds some important information and lessons on how we need to think about economics and investing for ourselves and for our future. And I’m gonna kind of skip over and paraphrase this, but just read a couple parts of it.
It says, Greece is set to return to the international bond market today, after four years of financial struggle. Well, really, there’s been a lot more years than four, of financial struggle. But not everyone is happy about it. Especially not the suspected domestic terrorist who set off a large car bomb in front of the country’s central bank. So, this would be equivalent to our Federal Reserve in the United States, or the European Central Bank in Europe, etcetera, etcetera. Their central bank. Hours before the bond issue, the huge blast in central Athens this morning shattered windows at the bank, and at the buildings up to 700 feet away, but fortunately did not cause any injuries, according to the AP. And there were actually two warning calls about this, received about 45 minutes before the explosion, which came a day before German chancellor Angela Merkel was supposed to visit the country.
Now, I don’t know if she actually did the visit, or is there now. But she imposed some tough conditions on the Greek bailout. Now, so, what is wrong with that? I mean, business is business! Shouldn’t we be appreciating the fact that Germany bailed them out in the first place? I don’t know. This is all a matter of perspective, obviously. But after six years of recession, public anger at austerity measures in Greece runs deep, with unemployment—get this—at 28%. And incomes down by around one third over the last four years.
So, authorities believe this is a leftist anarchist group that’s behind the bombing, and they say that the bond issue is a sign that Greece is finally emerging from its debt crisis. So, interesting, tragic news there. But that’s what you get when you have these big government entitlement programs, and you run the government into virtual insolvency, if not total bankruptcy. So, interesting. Interesting stuff. And another sign that countries that spend more than they receive, and spend their economies into oblivion, have to pay the piper some day. And the US is the one special circumstance, as unfair as it is, that I keep talking about, and I’ve talked about on the last 300 or so episodes, that really doesn’t have to play by these rules. And I’m not saying that’s right. I don’t think it’s right. But it’s just the way it is. So, listen to some other prior episodes for commentary on that. And we will kind of move on here.
Be sure to check out the properties at www.jasonhartman.com. Of course, inventory is light. It’s not as good as we’d like it to be, but that’s just the conditions of the marketplace. We know that the market has picked up substantially over the last three years, and get while the getting is good, because frankly, I think these rent-to-value ratios are going to get a little worse as time goes on. But we shall see! And I’ve talked about that a lot on prior episodes too, so. www.jasonhartman.com, click on the properties section, check those out.
And also, just so you know, this interview that we’re about to hear, was in the members section a couple of years ago. So, if you want to join and become a member, for a whopping 33 cents a day—yes, I know. That’s 10 bucks a month there, folks—you can do that at www.jasonhartman.com, and take advantage of some great resources, discounts on our products and our events, and we’d just love to have you in the members group there that you can join at www.jasonhartman.com, for a whopping 120 bucks a year, 33 cents a day.
So let’s get to the interview with attorney Garrett Sutton, as we talk about asset protection, and distinguish some very important things in the realm of asset protection, especially the internal and the external threat, and those of you who were at our Meet the Masters event last January, you heard me talk about that, and I kind of drew it out on the whiteboard there. Anyway, interesting stuff coming up here with Garrett Sutton.
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ANNOUNCER: Here’s your chance to catch up on all of those Creating Wealth shows that you’ve missed. There’s a 3-book set with shows 1-60, all digital download. You save $94 by buying this 3-book set. Go ahead and get these advanced strategies for wealth creation. For more details, go to www.jasonhartman.com.
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JASON HARTMAN: It’s my pleasure to welcome Garrett Sutton to the show. You’ve probably heard his name, as he is quite famous. He is the author of one of the Rich Dad series books, entitled Own Your Own Corporation. He’s got two new books coming out as well. He is an attorney, and he is located in Nevada, and I think you’ll be very interested in what he has to say about protecting your assets, and entity structuring, and this’ll be a very informative show today on that. Garrett, welcome! It’s good to talk with you!
GARRETT SUTTON: Thank you, Jason. Thanks for having me on your show.
JASON HARTMAN: So, hey. What is going on in the world of asset protection nowadays?
GARRETT SUTTON: Well, we’ve had some interesting developments. This last summer, the Supreme Court of Florida struck down single-member asset protection for LLCs, and that has created quite an uproar. Interestingly, the state of Wyoming came back and said, we are going to protect single-member LLCs, which just further strengthened Wyoming’s status as a good state for asset protection. But you know, Jason, it’s a dynamic area. There are changed all the time, and so you have to keep up with them
JASON HARTMAN: You sure do. Now, just tell the listeners, if you would, Garrett, what does that mean? So that means, someone had an LLC, where they had no other members, they just owned 100% of it? Florida, you said, struck that down, and said you can’t use that, it doesn’t work?
GARRETT SUTTON: Yeah. A lot of people felt that if they had a Florida LLC, that they were the only member of, they felt that they had asset protection. An interesting case arose; it’s called Olmstead v. Federal Trade Commission, and Olmstead was involved in credit card scamming, and so, you know, a bad guy, and the federal government, through the FTC, wanted to go after him. And they had the resources to take this all the way to the Florida Supreme Court. And the Florida Supreme Court said yeah, we’re gonna allow the government’s argument to be law here in Florida. We’re going to say that single-member, meaning 100% owned LLCs, in the state of Florida, do not have asset protection. Now, this follows a bankruptcy case in Colorado. There’s some case law in California that says the same thing. And so, what you’re starting to see is certain states deny asset protection for single-member LLCs. As I mentioned earlier, Wyoming responded by statutorily saying, we are going to give asset protection to single-member LLCs. So, it’s a dynamic area. You gotta keep up with the changes.
JASON HARTMAN: Yeah, it sure is. I’ve always viewed Florida as a reasonable friendly asset protection state. Of course, OJ went there after getting that big judgment against him from Daniel Petrocelli, and did his million dollar homestead, I believe it was, or unlimited homestead, I’m not sure which. And that’s interesting that Florida would sort of abandon those LLC owners. People must be fleeing in droves, huh?
GARRETT SUTTON: Well, they are. And the Florida legislature apparently is working on legislation that will correct it, and overrule the court, and provide asset protection for single-member LLCs. But in the mean time, you’re right, Jason. A lot of people are setting up Wyoming LLCs, and then qualifying them to do business back in Florida.
JASON HARTMAN: Interesting stuff. Well, this area of the world is pretty complex. If you had to pick one, and we’re gonna go into this and drill down more specifically. But if you had to pick one, is there one particular state that is really the best to protect your assets? I know Nevada’s name comes up a lot, and maybe that’s why you’re located there.
GARRETT SUTTON: You know, lately I would say that Wyoming is that state, Jason. Wyoming has kept their filing fees low, they’ve kept up with the law, again in our example, they’ve said that a single-member LLC will have protection, exclusive remedy, in Wyoming, is the charging order. That is the same in the state of Nevada, but they haven’t taken the step of defining that to apply to a single-member LLC as well. The other issue is price. Nevada—you know, I’m located there, I really like the state, but their prices have gone up. It’s $325 a year to maintain a Nevada LLC. In Wyoming, it’s only $50 a year.
JASON HARTMAN: But Nevada, I have to say, being in the Socialist Republic of California myself, that’s still less than half of what California charges.
GARRETT SUTTON: That’s true. You give people the choice of $50 a year versus $325 a year, most people go to Wyoming. Now, that said, when clients of mine have a number of entities, I like having some in Nevada, and some in Wyoming, and it forces someone coming after you to fight a battle in two states instead of one.
JASON HARTMAN: That’s a good point, that’s a good point. Let’s maybe just back up a moment here. Well, first I want to ask you one thing about what you said. Explain to the listeners, if you would, what is a charging order?
GARRETT SUTTON: Well, that’s the key to it all, Jason. That’s the crucible of asset protection, when it comes to LLCs and all. The charging order is a court order that says the person who has the judgment—you get in a car wreck, for example, someone gets a judgment, your insurance doesn’t cover it, they’re looking to get at your assets. And so, they will go to court and find out what assets you have, and then with an LLC, they, in certain states, can only get the charging order, which says, the person who has the judgment, the person who won the car wreck case, gets to stand in the shoes of the member of that LLC. They can’t force a sale; say the LLC owns a duplex. They can’t force a sale of the duplex to get paid. They can only be in the shoes of the member, meaning all they get are distributions from that LLC.
This is very effective asset protection, because since they can’t force the sale of the asset, they have to wait until distributions are made. In some cases, distributions won’t be made. People will decide to put a new roof on the property, or to pay various fees out. So, the person who has that charging order is not in a really great position to collect. Now, other states—California, Colorado, New York, Georgia—the charging order is not the exclusive remedy. In those states, people can apply to the court, and seek the court’s permission to sell the asset of the LLC. So that the judgment creditor, the person who won the lawsuit, can go in and force a sale of the duplex in order to get paid. So in those states—for example, in California—you don’t really want to set up a California LLC; you’d be better off setting up a Wyoming or Nevada LLC, and then qualifying to do business in California. That way you have the charging order protection in place with that entity. You have the choice of where you want to set up an entity; you go to Nevada or Wyoming, set it up, and then bring that entity into California or one of the other states that aren’t as good. So, the charging order is the key element to all of this asset protection.
JASON HARTMAN: So, question about the charging order. Someone gets the charging order, and they have to go to the favorable state where the listener has set up their asset protection, and wisely so. And the problem is, though, like you said, how do you extract your wealth without paying the creditor, that judgment creditor? Because, of course you can use expenses to do that, and not take money out of the asset, but at some point, maybe people are using the positive cash flow from that property to live on, or to pay other expenses outside of that entity, right? Doesn’t that become problematic?
GARRETT SUTTON: Well, there are two things to know here, Jason. The first is, attorneys that are looking to bring a case against you are going to size up what your asset mix is, and if they see a lot of your assets in LLCs, first they may not bring a case to begin with, because it’s very difficult to collect, and in a lot of these cases, attorneys are on a contingency, and they want to collect just as bad as the person who was in the car accident. And so, if they see that all these assets are in LLCs, they may be disinclined to bring the case in the first place. Say they go ahead with it. We saw a case in Oregon recently where the assets were all in LLCs, and the attorney realized it was going to be quite a battle to get at these assets, and so, they settled the case for 20 cents on the dollar. So, having your assets in these LLCs can one, prevent the case from being brought to begin with; two, it can allow for a discounted settlement.
Now, in a situation that you described, where people are relying on the cash flow and all, and someone has the charging order, you would have the manager of the entity could get paid; you could have the other members get paid. There’s a lot of flexibility within an LLC. You could have within your operating agreement a provision where the person who has the charging order against them gets bought out, and then the person who had the charging order would have to get paid with that. If you ever sold the property, the person with the charging order does get paid. But, the key to all of this is, it is a way—it is a roadblock that you want to put up. There’s no guarantee of what will happen, but you’re much better off having these roadblocks in place than not in place. Say that LLC did not exist, and the property was held in your individual name. This judgment creditor would have a straight shot at the asset. There would be no question that they would be able to force a sale of the asset.
JASON HARTMAN: Well, what are the most common areas of liability? And I want to make sure, Garrett, we cover two real core topics in this show. I want to cover real estate with you, and business. Because there’s a big difference between having a real estate portfolio, and having operating businesses, where—I’d say the operating businesses create a heck of a lot more liability usually than the real estate. It seems to me that in the real estate world it’s fairly easy to insure around a lot of the liability. But you may of course differ, and I’m sure you’ve got stories on that one. So, where do you want to go first? You want to talk real estate, since we’re kind of on that topic?
GARRETT SUTTON: Sure.
JASON HARTMAN: So, say someone owns several properties. Say they’ve diversified, they’ve been smart about it, and they own these properties in multiple states, so they’re not all hinged to one market in one city, and etcetera. And say they own properties in a couple three, four states, right? I’ve heard some people recommend you set up an entity, and I don’t know which kind, so you can tell us that. You set up that in one favorable state, and that becomes sort of your management company. But it doesn’t mean it becomes your property manager. You may have property managers that you’ve hired to manage your properties for you, but you kind of call this a management company. Is that a strategy, or, what is the best strategy for that multiple state property owner?
GARRETT SUTTON: Yeah, that’s a good question. A lot of our clients are in that scenario, and what we recommend is, if you’re gonna have a number of properties in various states, what we do is, let’s say you’re gonna have a property in New Mexico, and one in Texas. You would set up an LLC in Texas for the Texas property. You would set up an LLC in New Mexico for the New Mexico property. And then you would have those two LLCs be owned by a Wyoming LLC. Now, the reason we do this is, first of all, we have to distinguish attacks. Attack #1 is where a tenant or a vendor sues over the property. And you know, a tenant falls at the Texas property. Texas law applies, and so they can get what’s inside that Texas property. They can get the equity in that property, if your insurance doesn’t cover you. So, some people say, well, why set up an LLC if they can get what’s inside that property? Or rather, that LLC.
And the issue is, they can’t get what’s outside of the LLC. That’s the key thing. The tenant can sue, he can get the equity on the Texas property, but he can’t get at your New Mexico and all of your other assets; he’s limited to just the equity in the Texas property. So, that’s attack #1. Attack #2 is what we were describing earlier—when you get in the car wreck, it has nothing to do with the real estate. Someone has a judgment against you for a car wreck, or some other problem. They have to go through the Wyoming LLC to get at the Texas and New Mexico property. And under Wyoming law, even if it’s a single member, all they’re gonna get is the charging order. They’re not even gonna get past the Wyoming entity to the New Mexico or the Texas property. So, I like having LLCs in the various states in which you own the property, then having those LLCs be owned by one Wyoming LLC. And then you would have the asset protection at the Wyoming LLC level, in the event you were sued personally.
JASON HARTMAN: Okay, so here’s the question about that. #1, do you have to file a tax return for each LLC? I mean, what a hassle!
GARRETT SUTTON: Well, that’s the beauty of this, is that because the Texas and New Mexico LLCs are single-member LLCs, meaning, there’s only one owner, and that’s the Wyoming LLC—you don’t have to file a federal return for the Texas and New Mexico LLCs. They flow down to the next level, which is the Wyoming LLC. So, all your federal tax returns are done through the Wyoming LLC. Now, to the extent that you have a state tax return, that would have to be done in Texas and New Mexico. But this is a very good way—accountants like it. It’s very efficient. You’re not spending a lot of money on tax returns. And you just do one federal return at the Wyoming level. There’s no state tax in Wyoming, so, you don’t even have to worry about a Wyoming return. And you just file that one federal return.
JASON HARTMAN: What about a series LLC? Now, that’s not offered in every state, but if you have, say, four properties in one state—or, I guess up to 16 properties, because I think that’s the size of the usual series LLC, or something like that. Is that a good idea? That seems like a real panacea.
GARRETT SUTTON: I don’t like them.
JASON HARTMAN: You don’t like them. Okay, how come?
GARRETT SUTTON: I don’t do the series LLC. There are no court cases on it. I don’t want my clients to be pioneers on something like this. There are no court cases on it, no one knows what happens if one series goes into bankruptcy—how does that affect the other series? The state of California—we have to give them credit. At least they’re consistent. The state of California says, if you have three properties in three different series, you’ve formed one LLC, and then you have the three properties in separate buckets, if you will. The state of California says, well, you owe $800 for each of the three buckets. So, instead of paying just the $800 once, through the series LLC the state of California assesses $800 per series that you set up.
JASON HARTMAN: Yeah, and just so the listeners know, what Garrett is referring to is the completely ridiculous, overpriced, business-unfriendly $800 per year that the Socialist Republic of California charges you to have an entity in this state—in this oppressive state. Not that I have an opinion about that or anything. But okay, go ahead.
GARRETT SUTTON: Did you sugarcoat that for us?
JASON HARTMAN: [LAUGHTER]
GARRETT SUTTON: But you know, you’re not alone, Jason. I have a lot of clients that are trying to get out of California. They’re investing outside the state of California, in part, just because of the $800 per year per entity rule. It’s a great way for the state of California to get rid of businesses.
JASON HARTMAN: Yeah, it sure is. And they’re doing a good job of it. Businesses are leaving in droves. So, that’s the plan for real estate. What else you want to talk about, real estate wise?
GARRETT SUTTON: Well, we are helping a lot of foreign investors coming into the United States. Our doors are open for investment. The laws apply to you from Canada and Australia and elsewhere, though. You do need to set up an LLC—in Canada, most people use limited partnerships, because they track well with the taxation in Canada. Australians are using LLCs, for setting up their protective entities in the United States. But, we’re seeing a lot of foreign activity, and the laws are the same, so, when you come over here, be sure that you set up an LLC, or LP.
JASON HARTMAN: Limited Partnership or LLC for real estate ownership. Now, one question I have to ask you about that, Garrett, and I’m gonna make a bit of a criticism of your industry here, okay? So I hope you don’t mind. But, there are a lot of these groups out there. These big, I’m gonna call them mills. Entity mills, like—well, I’ll let them remain nameless. But you know who they are.
GARRETT SUTTON: I know who they are.
JASON HARTMAN: And a lot of them are based in Nevada, by the way—
GARRETT SUTTON: They’re all in Vegas.
JASON HARTMAN: One of them has Nevada in its name. It seems like they just want to sell people a lot of stuff, a lot of entities, and what I find is that the investors will go and they’ll spend, really, kind of a small fortune on this, when they could have just spent that money to buy a property. And then they get tired of managing them. And when I say managing, I mean, filing all the separate papers, the separate tax returns, keeping the separate bank accounts—that can become pretty complex, faster than most people realize. What do you have to say about that?
GARRETT SUTTON: Well, you’re absolutely right, Jason. There are these boiler rooms, that you can hear people talking next to each other, and they’re on the phone selling, and they’re selling far more entities than most people need. You know, if you’re buying your first duplex—I went to a seminar where an asset protection guru had been there a couple weeks before me, and this lady came up, and she was buying a duplex, and this guy had her spending $20,000 to set up all these layers of protection. And she didn’t need it! All she needed was one LLC. And so, please be careful. There are a lot of bad people out there, selling you more entities than you need. Our office, if you call us, we’ll go through the structure with you, and we—I tell our people there, we are not here to sell more entities than they need. If they just are buying that first duplex, all they need is one LLC. So, yes, I share your concerns there.
JASON HARTMAN: I think part of the issue comes in—if listeners are buying larger properties, commercial properties, mobile home parks, self storage facilities, apartment buildings, or anything above the size of a fourplex, for example, it sort of gets reasonably efficient to have entities, and to do all of that structuring. But when you’ve got the three single family houses spread across three different states—are we kind of putting the cart before the horse here? A good insurance policy can protect most of this stuff, can’t it?
GARRETT SUTTON: Well, that’s a good question. I don’t have the answer to that, Jason, because some of these insurance companies—you know, they have an economic incentive not to cover you. They’re there to take your premiums, but there’s a whole area of law called bad faith litigation—
JASON HARTMAN: Yeah, insurance bad faith. The books are riddled with it, sure.
GARRETT SUTTON: And it has to do with insurance companies. So, insurance certainly is the first line of defense. But these entities are the second line of defense, and I always recommend that people have them. Now, for three single family homes with not much equity in one state, I would say you probably only need one LLC. When you have a single family home in three different states, once you’ve set up the three separate entities, you’re gonna be paying the same amount in annual fees for one entity as you are for three entities, right? Because the annual fees have to be paid, whether you have one LLC qualified to do business in three states, or three separate LLCs. So, in that situation, I would recommend the three separate LLCs for the better asset protection. It’s not going to cost you anymore. But at the start, yeah. Let’s not set up more than you need. But at the same time, let’s keep you protected.
JASON HARTMAN: Now Garrett, maybe just talk about the cost for a moment, if you would, before we move on to the business side of the equation here, while we’re on the real estate side. What does it cost to set up these entities?
GARRETT SUTTON: Well, we have a flat fee of $695, and that includes the consultation with our account reps, the filing of the articles, we tailor the operating agreement for you, we prepare the minutes and the stock certificates, we give you the corporate binder, we give you a book that shows you how to prevent the corporate veil from being pierced, and how to do your own minutes. We’ll do the minutes for you if you want, but we give you a book that shows you how to do them. And we offer a discount for your listeners, if they call in—it’s $595. So, it’s not expensive. People say, well, I can just go to LegalZoom and do it for $99. But it’s very interesting. If you listen to those LegalZoom ads—
JASON HARTMAN: They’re not really true; they’re misleading, I think.
GARRETT SUTTON: It is! And the ad says, we will set up the entity at your specific direction. So, what that means is, they don’t give you any advice on which entity is proper! You could call them up and say, I want a C corp to hold a fourplex—that is the absolute worst way to hold real estate. You’ll never hold real estate in a C corporation. But at LegalZoom, you call in and ask for it, they’ll set it up for you that way. So, you’re not really getting any assistance on the right structuring for your specific situation.
JASON HARTMAN: Yeah, and I hate to kind of pick on LegalZoom, because I’m sure they’re a great company and so forth. But what I find is, when I’ve tried to use LegalZoom before, by the time you kind of add up all these different fees, it’s a lot more expensive than it sounded like in the commercial. So, anyway. That’s just my thinking.
GARRETT SUTTON: Well, no. The $99 is a come on. But for us, the $595 is everything. We’re not gonna be charging you. We do have to charge to qualify into the next state, so, you set up that Texas LLC and you want to qualify to do business in a different state, there’s an extra fee for that.
JASON HARTMAN: How much does that cost, by the way?
GARRETT SUTTON: That’s $250.
JASON HARTMAN: And is that an annual fee, or a one-time fee?
GARRETT SUTTON: One time.
JASON HARTMAN: Just one time. And then, what should a listener expect as annual fees to maintain these various entities?
GARRETT SUTTON: Well, for example, with Wyoming—great state, it’s only $50 a year to the state of Wyoming. When you set up an entity with us, the resident agent fee is free the first year. So, that’s included in the $595. But then, the second year, we charge $125 to be the resident agent, for example, in our office in Jackson Hole, Wyoming. So, if you have a Wyoming LLC, your annual cost for that is $175. $50 to the state of Wyoming, and then $125 for us to be the resident agent.
JASON HARTMAN: Why don’t you just explain what a resident agent is? Because you need that in any state where you form the entity, right?
GARRETT SUTTON: Right. Well, the resident agent is there—it has one main function, and that is to accept service of process, which means a lawsuit. So, it used to be that you would set up a corporation, and someone who wanted to sue you had no idea where you were doing business. You may have left town, it was very difficult. So, the states all said, look. We have to have someone resident in the state who can accept service of process. And so, that’s the main function. And so, our office in Jackson Hole, Wyoming, we would, you know, we’re open for business. Someone has a lawsuit, they serve it on us, and then our job is to get it to you as soon as possible. Because in many of these states, you only have 20-30 days to answer the complaint. So, you need to get a lawyer on it, and you need to answer that right away. If you use a resident agent that’s slipshod, that isn’t open for business, you may not get that notice, and someone can get a default judgment against you. Meaning, they go to court, they say we served this person at their office in Nevada, or wherever, and they didn’t respond. We went. And that’s what a default judgment says. They’ve won the case. So, you need a resident agent that appreciates the consequence of a lawsuit, and gets you that notice right away.
JASON HARTMAN: Sure. And Garrett, before we leave the real estate topic, there is one more area I wanted to cover with you. There’s a lot of interest nowadays for the past couple of years, most people at this point in time think the stock market is headed for trouble, and overvalued. There’s a lot of interest in taking IRA accounts, and buying real estate through one’s IRA. And what a lot of people I don’t think realize, and you’ll have a lot to say about this I’m sure, is that if you have, say, $500,000 in your IRA, and you buy a $60,000 single family home, and you don’t use an entity inside of the IRA, then if someone were ever to attack, if there was some liability generated out of that property, they could attack your entire IRA. Whereas usually, it’s shielded, right? Because in the OJ case, when Daniel Petrocelli got that big judgment against him, he had several million dollars in his retirement account, which they couldn’t attack that, right?
GARRETT SUTTON: Right. And you described it perfectly. I mean, that’s what happens. You have that $60,000 property in the name of the IRS, something bad happens on that property, they have a straight shot into your $500,000 IRA retirement account. So, what you need to do is have—you’ll be using a self-directed IRA trustee, and you have the self-directed IRA people call our office and set up an LLC for the $60,000 house. If there’s a lawsuit, someone suing over the property can only get what’s inside that LLC, the $60,000 property. They can’t then go and try and reach the$500,000 IRA account, and you do want to protect those assets by using an LLC.
JASON HARTMAN: Now, is setting up an IRA LLC more complex or more expensive in any way?
GARRETT SUTTON: Nope.
JASON HARTMAN: I asked you that as a bit of a trap. I just gotta be honest with you. Because other law firms have told me that it is, and that they charge more for it.
GARRETT SUTTON: Ah. No.
JASON HARTMAN: Same thing, okay, great.
GARRETT SUTTON: Same price.
JASON HARTMAN: Okay. Anything else we need to know about the IRA part of it?
GARRETT SUTTON: Well, there’s a lot of promoters out there, saying, you can use your IRA moneys to start a business, and do this and that. If you’re in any way involved, that’s considered a prohibited transaction, and so, you’ve gotta be very careful that you are not managing that IRA, business or real estate. You hear these people talking about a checkbook IRA. It doesn’t work that way. The IRS is going to be cracking down on that in the next year or so, because people are very much—they’re misusing their IRAs. You can’t have any sort of management control over those moneys. That’s why you have the IRA self-directed trustee. That’s their job to manage the property.
JASON HARTMAN: Right, and it would be disqualified because it’s not an arm’s length transaction, right?
GARRETT SUTTON: Right.
JASON HARTMAN: Good. Hey Garrett, let’s switch gears now to business. Because a lot of our listeners have businesses. If they don’t have a business, I think they should have a business, even if it’s just a small sideline business. But say it’s a real business, it’s like their main career is having a small to medium sized business, or whatever. What do people need to think about as far as asset protection and entity structuring for businesses?
GARRETT SUTTON: Well, the first thing they should realize is, when you operate a business—when you deal with the public—you have a very high chance of someday being sued. So, just as we’ve talked about, there are risks associated with owning real estate. There certainly are risks associated with operating a business. So, at the start, you want to make sure that you set up a protective entity, be it an S corp, a C corp, perhaps an LLC. You want to set it up right at the start. With all due respect to CPAs, a number of CPAs will tell their clients, you’re not making enough money right now in your business. Just start out as a sole proprietor. That’s really bad advice. Because you can get sued at any time, and if you’re a sole proprietor, not only do they have a shot at all your business assets, but they have a shot at all of your personal assets. So, you need to take steps right at the start to set up a good, protective entity. And at the same time, as you do that, you’re gonna be building business credit through that separate entity. We want to, over a period—it takes 18 months to two years—start establishing business credit so that in the future you can finance activities, not just with your personal credit, but also with business credit as well.
JASON HARTMAN: Good point. So, business credit though—isn’t that just kind of impossible to get nowadays?
GARRETT SUTTON: No, no, it’s a process, and beware of these companies that say that if you buy this old entity you’ll have $80,000 worth of business credit. It doesn’t work that way. But if you set up an entity, and you start following steps for building business credit over a period of 18 months to two years, you can indeed have business credit through your business.
JASON HARTMAN: Even in today’s lending market, huh? That’s fantastic. So, with businesses—the S corp, is that the ideal entity for business?
GARRETT SUTTON: I like the S corp, because you are able to minimize payroll taxes by using an S corp. What you’ll do is you’ll pay yourself a reasonable salary, and you’ll pay payroll taxes on that, and then, moneys above—profits above your salary can be distributed to you without having to pay payroll taxes. Now, the government may crack down on this, and the IRS certainly looks at cases where, for example, someone pays themselves a $20,000 salary, and then flows through $500,000 in profits. That case will be subject to IRS review.
JASON HARTMAN: That’s not reasonable, right.
GARRETT SUTTON: But you work with your CPA, and there are many circumstances where you pay yourself a reasonable salary, and you can then flow the distributions through without having to pay the 15%, or on top of that, the 2% plus for Medicare. So, I like the S corporation. Nevada has just allowed for charging order protection, which we talked about earlier. The key to asset protection in LLCs and LPs is the charging order. Nevada now offers the charging order for corporate shares in corporations that have between two and 75 shareholders. So, that’s really good asset protection. So, when you’re setting up your business—say you decide, I want to be an S corporation. Consider setting it up in Nevada, you and the other shareholder, and then qualifying, meaning bringing the Nevada paperwork back to your home state, and qualifying with the secretary of state to do business there.
JASON HARTMAN: Excellent. And you still have to know, in California, you still have to pay the $800 per year to what, is that called domiciling the corporation?
GARRETT SUTTON: Yeah, it’s a foreign corporation, i.e. it’s formed outside the state of California, and so, the foreign corporation then qualifies to do business in the state. And when you qualify, you have to pay the same fees to the state as if you started there in the first place. So, for example, with a Nevada entity, you’ll be paying $325 a year to the state of Nevada, and then you’ll also be paying the $800 a year to the state of California.
JASON HARTMAN: Now, are there some tax strategies here that people should be thinking about in terms of, well, LLC tax issues in California, that’s one thing I know you bring up. Maybe you want to address that one?
GARRETT SUTTON: Yeah, that’s a big issue, Jason. In California, the LLC is such a great entity that California decided, let’s tax it extra. So—
JASON HARTMAN: Welcome to California!
GARRETT SUTTON: No surprise there, right? If you have gross receipts—that’s money coming in the door, that’s not profits—gross receipts of $250,000 a year or more in an LLC, you start paying extra taxes. And say you have $5 million a year in gross receipts. You’ll pay an extra $11,000 for the privilege of using an LLC in the state of California.
JASON HARTMAN: One thing I want to say that’s very scary about what you just said, Garrett, is that everybody listening may have casually dismissed that, and they didn’t really hear your words. You said gross receipts, not net receipts. In other words, the last company that I sold a few years back—it was doing $5 million a year, and I remember one of those years I made like no money, and 5 million bucks went through the checking account, and I’m like, how did that happen without me making money?
GARRETT SUTTON: Right.
JASON HARTMAN: And most people—everybody likes to think that every business owner is totally rich, and they’re not! And so, they would have taxes me $11,000 on money I didn’t even receive on my gross, not my net?
GARRETT SUTTON: Mhmm.
JASON HARTMAN: That’s ridiculous!
GARRETT SUTTON: Well, that’s the state of California. I mean, the strategy, if you know you’re gonna get into those levels, is to set up a limited partnership. They don’t have such a tax with limited partnerships. The issue with a limited partnership though, is you need two entities. The general partner is personally responsible in a limited partnership, so you have to set up a corporation or an LLC to be the general partner. So you have to pay for two entities, instead of one. so that’s $800 times two; that’s $1600. But that’s a lot better than paying $11,000 with an LLC that’s grossing a lot of money.
JASON HARTMAN: Good point. Other tax issues though, that I wanted to ask you about—when you operate a business in an expensive tax nexus like California, I’ve heard promoters—and they may be really crossing the line here, I think they might be. But maybe not. Maybe there’s ways to make is totally legitimized, I’m not sure. The idea is that you want to move some money out of the expensive tax nexus into the more favorable one. Is that legit? Can it be done legitimately?
GARRETT SUTTON: Well, yeah, after you pay taxes on it. Here’s the issue though. If you’re a California resident, and you have Nevada LLCs and Wyoming LLCs, there are two things to know. One is, as a California resident, that income flows back to you in California, and you’re gonna pay California tax on it.
JASON HARTMAN: Well, if it’s an S corp though, right?
GARRETT SUTTON: Well, if it’s a C corp, then it could make sense.
JASON HARTMAN: Yeah. I mean, does it ever make sense to use the C corp—and maybe Garrett you just want to explain the difference of the S and the C to the listeners? We sort of glossed over that and never really explained it, if some don’t know.
GARRETT SUTTON: Yeah. The S corp is a flow through tax entity, like the LLC or the LP. There’s no tax at the corporate level. Everything flows through to the shareholder, and the shareholder pays tax on the income they receive. The C corp, on the other hand, you pay a tax at the corporate level, and for the first $50,000 in profits, it’s only 15%, or $7500. But then, when you make distributions, after tax distributions to the shareholders, they have to pay tax again. So you’re getting taxed twice on the same dollar of income. So, in many cases, for real estate, you’re gonna use an LLC. For small businesses, a lot of people will use an S corporation, which has the flow through taxation. It’s just a better tax regime for people. But the C corp has its advantages. There are times when you do want to accumulate money, in a C corp. You can have money come into a C corp, pay the corporate tax, but not make distributions for a period of time. So, the C corp has merits, but in 90% of the time, Jason, we’re setting people up in flow through entities, be it an S corp or an LLC. Now, one other thing I want to mention is that the C and the S stand for tax code provisions, in the tax code. So, the C corporation is section C, that says, we have to pay a corporate tax. The S corporation is section S, which says we have flow through taxation.
JASON HARTMAN: And the flow through taxation is very good for the small closely held company, obviously. Large companies are all C corps, and the two major reasons, as my understanding for that, is #1 they want to have retained earnings, even though you do get a double dip on taxation. A big company needs to retain earnings for its operations. And then the other reason is you have two classes of stock. So if anyone listening is planning to start a business and raise money, and go to Angel Investors, Venture Capitalist, etcetera, then the C corp becomes something you want, right?
GARRETT SUTTON: Exactly. And there are two other little wrinkles here. With an S corp, you can only have 100 shareholders. So if your company’s going public, by definition you’ll have to have more than 100 shareholders. And then, with an S corp, it can really only be owned by individuals, their living trusts, in some cases, other S corps. But in an investment scenario, you may have investors that want to invest in your company through an LLC, or through a C corp, and so, you don’t have those options with an S corp. you can’t have shareholders that are anything other than the individuals and the living trusts and all.
JASON HARTMAN: Good point. We haven’t touched at all on living trusts. There’s a zillion types of trusts, I guess, out there. The spendthrift trust, the family limited—well, the family limited partnership’s not a trust. But, various types of trusts and so forth. And other things, other things like that. Do you want to talk about those?
GARRETT SUTTON: Sure, Jason. The main trust that people are gonna be dealing with is the living trust. And this is a very good document. It helps you avoid probate. When you pass, if you just have a will, or you don’t even have a will, your assets have to be reviewed and distributed by court orders. So, you have to go into court, the attorneys get paid a percentage of the estate, it’s time consuming, it’s open for public view. The probate process is not the best way to go. A much better way to go is to set up a living trust. And with a living trust, you don’t have to go into court. The trust details how things will be distributed. And so, over the last 40 years since the advent of living trusts, it’s become a very popular way for people to handle their—the distribution of their assets, and engage in estate planning. The one thing about the living trust, it’s important to realize that it provides no asset protection.
There are a lot of promoters out there saying, set up a living trust, you’ll have asset protection. That’s not the case. If you own a duplex in the name of your living trust, it’s as if it’s in your individual name. Someone can get at all your assets. So, we need to have the living trust work together with the LLC. So, say you own that fourplex. The title to the fourplex is gonna be in the name of the LLC. That’s where you get your asset protection. In turn, the LLC is owned by the living trust. That’s where you get your probate avoidance. So, the two work together. The living trust is by far the most common trust. There are other trusts out there. The spendthrift trust is an irrevocable trust set up so that children and all, if they get into trouble, the assets can’t be reached by a creditor. Nevada now has what’s called the Nevada asset protection trust, which is a self-settled trust, which means you can set it up for your benefit. You set it up, and you’re the beneficiary. And once the assets have been in this trust for two years, creditors can’t get at the assets. It’s a pretty good way to go. But those are the two common trusts that you’re going to see—the living trust, and the irrevocable or spendthrift trust.
JASON HARTMAN: Good to know. Partnerships—any of these more exotic ones, other than just a traditional partnership? I constantly hear in asset protection circles about the family limited partnership.
GARRETT SUTTON: Yeah, it’s important to know, Jason, there’s no such thing as a family limited partnership. If you look in the statutes of all 50 states, you will never see a creature called the family limited partnership. What it is, is just a limited partnership that happens to hold family assets. The limited partnership has its place in all of this, as we mentioned earlier. By definition, you have to have one limited partner, and one general partner. Well, the general partner is personally liable for whatever happens in that limited partnership. So, you wouldn’t put your name down as the general partner. What we need to do is set up an LLC or a corporation to be the general partner. So, unlike the LLC, where we only need one entity, with the LP, we need to set up two entities. That said, it does have its place. It’s really good for gifting and estate planning. But just be careful of promoters out there selling something they call a family limited partnership that is much better than a limited partnership. It’s not. It’s the same thing.
JASON HARTMAN: Yeah, that’s a great distinction. The FLP is really just a result of good attorney marketing and branding then, right?
GARRETT SUTTON: The FLP is just an LP.
JASON HARTMAN: Okay, good point. Great. Well hey, Garrett, this has of course been extremely informative. What else do you want people to know? First of all, I want to tell the listeners, go to www.jasonhartman.com/offers. Garrett has been very generous in providing some discounts and some information, and it’ll all be there. www.jasonhartman.com/offers, and that’s just a special thing for our listeners, so, thank you very much for that, Garrett. Wrap this all up for us in a big bow, and tell us what else you want us to know. Anything we missed, didn’t cover, etcetera?
GARRETT SUTTON: Well, I think one thing to know, Jason, is, everybody needs the asset protection. We live in a very litigious society. And you need the asset protection. That said, it doesn’t have to be expensive. Be very cautious of people who are saying that this is going to cost you thousands and thousands of dollars. Be extremely cautious of people who say, your lawyer won’t understand this, so don’t even explain it to your lawyer. It doesn’t work that way. We provide these asset protection services as a law firm; we’re happy to talk to your existing attorney, your CPA, it’s a team effort. And so, we’re happy to work with whoever you have. And again, it’s not very expensive to set up. The problem is, if you don’t set it up—if you get sued, you can’t put your assets into LLCs at that point. You can’t put the seatbelt on after the car wreck. So, take steps now, set up your entities now, before you engage in a lot of wealth building, and you’ll be much better off.
JASON HARTMAN: Very good point. This has all got to be preventative in nature. Now, Garrett, you’ve got two new books coming out. Tell us about those.
GARRETT SUTTON: Well, I wrote Own Your Own Corporation as part of the Rich Dad series, and I’ve had a lot of people say, well, what do I do once I’ve set up the corporation? And so, I’m splitting the book into two. We’re gonna do start your own corporation, for getting it started, and then run your own corporation, and we’ll look at what you need to do during that first key year, and then a few years afterwards. So, I’m splitting up the book. It’ll be a few months before it’s out. But we’re just getting more good corporate information for people.
JASON HARTMAN: Excellent. Well, good stuff. Garrett Sutton, thank you so much for joining us today, and we really appreciate having you on the show. Thank you so much.
GARRETT SUTTON: Thanks, Jason.
JASON HARTMAN: [MUSIC]
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Transcribed by David
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