Transcription
So many people think that setting up an LLC is just clicking the mouse, filing some paperwork with the state, I’m done, and moving on. Now, that’s technically true, but that’s only the first step in the process. What people screw up is the location of where they set up the entity, the ownership structure. For tax purposes, how did they put it together? Did they put family members on there that they shouldn’t have? And then it comes to timing. Did you set it up too early or too late? This is what it costs people in taxes and a potential lawsuit. And regrettably, these are decisions that need to be made at the outset, and then a year or two years down the road, we discover all these problems, and now it’s too late to fix.
Now, my name is Mark J. Kohler, CPA, attorney, bestselling author, and my amazing team at our law firm have set up over 50,000 LLC’s over the past 20 years, and we have seen every possible way a business owner or investor can screw up setting up an LLC. So today, I’m going to walk you through the big mistakes so many people unwittingly make and also talk about the issues to make your LLC the most powerful and useful to you. Where are you going to set it up? When are you going to set it up? What’s the structure? Who should be the owners and get you the best tax and asset protection results? So let’s dive in and get started. And you better have something to write on.
Before we can even talk about where you set up your LLC and how we structure it, we need to know the purpose of this LLC. This is absolutely critical because a lot of times on these sexy websites, they’re saying, “Set up in Wyoming, set up in Nevada, set up in Delaware,” and this is why you need an LLC. Well, they’re making a guess on your personal situation, and they have no idea. So what I want to do is put some framework around this. I want to talk about the purpose of the LLC based on what you may be trying to do. And the way I do this is with the trifecta.
Now, if you’re a follower of mine and you may be binging on some of my YouTube videos later, I have created a visual representation of how every business owner we ever work with in our law firm, especially over the last 10 years, is based on this trifecta image. So let’s dive into it. And I’d love you to diagram this out for yourself if you’re at a place where you can grab a pencil and a paper and start thinking about your personal situation.
So the foundation of the trifecta is your revocable living trust, and it’s also where all of your money flows. It’s down to your 1040. So there’s kind of this ownership aspect and also the tax aspect. We’re going to bring those both together. Now, this is going to help answer so many of your questions. So we have this foundation, your revocable living trust. Now, you do not have to be rich or have seven kids and be on your second marriage to need a revocable living trust. We’re talking about even single individuals that are just getting started with their business or investing. A revocable living trust is your legacy. It’s your future. It’s why you’re doing what you’re doing. And we want to avoid lawyers and messes and mistakes. And we also want to create some privacy. And this is why we have a revocable living trust at the foundation. Now, do you have to have this before you set up your LLC? Absolutely not. But we are going to work in that direction. And I want you to see the long term here as we go to build this LLC structure. So the foundation is your revocable living trust, is going to be you down here until then. And we’re going to put over here on the left side your operations. And then on the right side, we’re going to put your assets.
Now, what does this look like? You may have a day job. Okay, that’s cool. You may be married and your spouse has a day job. So times two, two W2s out there. That’s fine. But now, over 50 million Americans have a side hustle. And that side hustle starts with an LLC. And the LLC is where you’re going to claim all of that revenue or income. Whether you get a 1099 or not, you’re required as a US citizen to claim all that income. We’re going to take all those tax write-offs, and that LLC and all that income is going to flow down onto your 1040. That LLC is going to be owned by your trust. Until then, it would be owned by you. So this LLC is an operational business, and at some point, we’re going to convert that into an S corporation.
Now, if you’re out there right now watching this video, setting up an LLC for your business, we, you need to know that in the long run, we’re going to be talking about this S corp. And I’ve got other videos about that. I’ve got freaking chapters in my book about it, and on my podcast, you can learn more about it. But for now, we know we’re going to start out as an LLC. This is what’s going to give you an EIN. It’s going to give you a bank account, and you’re going to start running that business and branding yourself. You don’t need a trademark. You’re going to just nail the name of that LLC. And you might own URLs or have several websites, and you’re going to go out on Upwork or Etsy or eBay or whatever the hell you’re going to do and start that business and run it.
This LLC, okay, is going to be set up in the state where you live because that’s where you’re doing business, and we’re going to have to be set up in the state where you live in order to evolve to the S corporation and start saving big money in taxes. And this LLC is going to give you asset protection for when you or maybe future employees are driving down the road, or you’ve got employees working in the office, or who knows what. This gives you wonderful asset protection and the ability to scale in the future. So you do not want to get sucked into point number two, we’re going to come to in a moment, on where you set up your LLC. We do not want to get sucked into setting up this LLC in Wyoming. And they may say, “Set it up in Wyoming and then register in your state.” Why? There’s this LLC is not even going to own assets. It’s a shell. Money in, money out. And I want to protect your home and you from potential lawsuits, but we don’t need to set it up in Wyoming. It is a scam. It is a ripoff. And I promise you you’ll be back in my office a year from now, moving your LLC to the state where you live because it got jacked up getting set up in Wyoming. That is what I call an operational LLC. And if you are a small business owner, you’re going to set it up in the state where you live. Boom.
Now, if you’re going to invest in some real estate, maybe you have some rental properties, or you buy your own shop or office to rent to your business, or you’re going to buy some crypto or some stock or this or that loan money, that’s an investment LLC. So now we go to the right side of our equation. So over here, we might set up an LLC to hold a rental property. Oh, now this is great. I’m going to maybe live in Arizona, and I’m going to set up an Arizona LLC, and then I’m going to go out and buy a rental property in Tennessee, and I’m going to set up a Tennessee LLC because that’s where the rental property is. I am actually required by the Secretary of State of Tennessee, if I want asset protection in Tennessee from the tenant that might get hurt, pissed off, or whatever, I need to have that LLC registered in Tennessee. This is step one. Now, we might add some other LLC’s with some advanced planning. I’ll share that in a moment. But what we want is our LLC set up where the investment property is. And you may say, “Well, do I have to set up another LLC for every new rental property?” No. You might pop into this a couple rental properties, but the more properties you get, the more equity you build. I may not want all of my eggs in that one basket. Oh, so we set up another LLC in Tennessee. Oh, but I picked up a rental property in Georgia. Oh, okay. Maybe we set up an LLC in Georgia. This is where having a consultation with a lawyer that’s been doing this every day could really help you.
So let’s take a quick tangent. Let’s talk about the DIY process. Am I saying you can’t set up your LLC yourself? No, I’m not saying that. You could go on some website that’s going to go click, click, click and give you an LLC wherever the hell you need it. But I recommend that to my clients that have already done this three or four times, maybe six or seven times. They know how they want the LLC structured. They know where to set it up. They know what to look for in the documents. Does it have a good operating agreement? Does it have minutes? Did I get my membership certificate? Did I get my corporate book? Yes, you need all of that. Did I get the right EIN? Did I make it member-managed or manager-managed? These are issues that people screw up all the time. And heaven forbid they get sucked into setting it up in the wrong state. So if this is your first time and you’re trying to figure out your trifecta and where you’re going to set up your LLC, please use a lawyer at my office. It’s extremely affordable. We help clients in all 50 states. And for around $1,100-$1,200, you’re going to have time on a call with a real lawyer, building your trifecta, setting up the LLC, and answering all these questions and more that you don’t even know to ask.
So with that said, let’s get back to this, and we start thinking about how many LLC’s do I need? Well, that’s where that lawyer might help you. But my rule of thumb is it’s not quantity, it’s quality. I mean, if you’ve got three crappy little rentals, you throw them in the same LLC. I don’t care. Oh, but this one over here, this is my Airbnb in Augusta, Georgia, at the Masters. Oh my gosh, that’s worth a million dollars. Okay, that’s going to deserve its own LLC. So we can set up LLC’s based on where the property is and how much equity involved and how much risk is involved. If I got a bunch of college kids living in a rental property, that creates more risk than a cute little grandma living in a duplex over in Augusta, Georgia. So let’s be thinking about quality, not quantity, as we determine how many LLC’s we set up.
Now, let’s hit a couple advanced issues and then get into the actual ownership structure. One of the advanced issues is why is Wyoming so important? When does that really come into play? Well, let’s go back to the trifecta. Where Wyoming starts to play in is we want better asset protection because our portfolio is growing. Now, I’ll go deep with you here. I don’t want to dumb this down for the average person. You’re here listening and watching to this because you’re a business owner and investor, and you want to know the truth. So here’s how this really works. If you set up an LLC to protect you from this rental property boom, that’s great. Your trust owns the LLC. Maybe you own the LLC for now. That’s cool. And something goes wrong with the rental property. And you’ve been a good landlord. You listened if they called. You fixed the guardrail or, or I mean, the handrail on the stairs or whatever. You weren’t a slum landlord. If it had ice in front, you made sure there was snow removal, whatever. So if anything goes wrong pinging you, you’re protected. Well, what happens if you’re driving down the road, texting and driving, something I’m trying not to do, and you get into an accident and lo and behold you get into a lawsuit and a plaintiff comes after you and they want to get at your assets? They want to get at the home you may live in that’s owned by your trust, and they want to get at those cute little rental properties in your Tennessee LLC. Well, guess what? In over 25 of the over half of the states, they can get into your LLC and take away your rental. Yeah. And some of you are like, “Well, what, I set up an LLC to protect my rental property.” No, no, no, no, no. We set up the LLC to protect you from the tenant in your rental. We didn’t set up the LLC to protect the rental from you being a dumbass. We set up the LLC to protect the rent, you from the renter.
So what’s next level? As you build more wealth and more equity and more properties and more LLC’s, then we add the Wyoming LLC into the mix. We put a Wyoming LLC in the mix because they are awesome for what I call outside protection. It’s called a COPE entity. You can Google the crap out of it. I got great blog articles and podcasts on it. But what happens if someone comes after you and they’re going to sue you? They cannot get into the LLC, the Wyoming LLC that happens to own your Tennessee LLC, your Georgia LLC, and your Arizona LLC because what you’ve done is created this extra layer of protection. That’s when we set up a Wyoming LLC. But it just breaks my heart that everybody out there that just dips their toe into business or investment property gets sold this idea of a Wyoming LLC, and there’s companies out there selling them to anybody with a pulse and ripping them off. That’s not going to happen at my firm. And so you may say, “Well, I don’t want to pay a lawyer to do this. I can just do it online.” Yeah, and set it up in the wrong spot and have to unwind it later and have a complete disaster with your banking and your EIN when you would have saved a lot more to just do it right from the beginning. And, and again, as you get more and more experienced, you can set up your own LLC’s when you need to. But when you’re just getting started, please realize that using a professional might actually save you money and help you scale faster and build your wealth quicker, people. If I have a problem with my plumbing in my house, I call a plumber. I let them stay in their lane. And my plumber is such a great guy, Tom. I just called him the other day to help with another issue on a rental property. And he asked me a legal question. I was like, “Comm, thank you. I’ll stay in my lane. You stay in your lane.” See, that’s how it works. But if you want to watch Law and Order and Blue Bloods this weekend and think you can knock out an LLC staying in a Hampton Inn, that’s great. Just be careful.
Now, the last point I want to bring up, and believe it or not, is not how to check the boxes at the state and set up your LLC paperwork. I just again remind you, get all the pieces and parts you’re supposed to, but what I want to talk about is the actual ownership. So when you start out with your LLC, and if we go back to our trifecta, it may be you that owns the LLC for your little business, or it may be you that owns the LLC with your rental property. That’s fine. That’s level one. But as soon as you’re able, and if you, a lot of time, we’re going to give you a discount. You do at the same time because it makes sense, or you can add it later. We’ll add the revocable living trust and let it own the LLC 100%, and I’m not going to put your spouse or your kids on as an owner. That jacks it up. Now, I’ve got to file a 1065 tax return rather than a Schedule C and a Schedule E. See, as a CPA and an accountant, and all of my lawyers are trained as tax lawyers, we want to make sure we’re thinking about the tax return you’re going to file after you set up the LLC. See, there’s a whole other world you’re opening up when you set up that entity. And the next point, we are always going to set up manager-managed LLC’s. I, it’s so important because as a manager-managed LLC, in really 49 states—Arizona is one of the ones that, kind of using that example earlier, as one of the pain-in-the-butt states where I have to disclose the owners—but in 49 of the states, 48, 49 states, I don’t have to disclose who the owners are, just the manager. This allows to create more privacy, which brings up the registered agent issue. At our law firm, we can be the address for your LLC, so your personal address isn’t out there. We can be the address for your entity and scan your mail as we receive it and email it to you. Woo! Now your home address is nowhere to be found. So privacy coupled with the right structure for just a few hundred bucks a year, cheaper than a P.O. box, you can have privacy with your entity because we set it up as manager-managed by you and then ultimately your trust.
So there you go. Seriously, I’ve given you so much inside information on how to set up an LLC properly, all of the issues that come into play when you’re building your business, and we just got started here in what, 14 or 15 minutes? There’s so much you don’t know either. Check out my YouTube channel if you’re not already watching this video there. And if you need that consultation, down in the description below is the link to our law firm, KKOS Lawyers. We’re setting up entities in all 50 states. We’ve got incredible lawyers that’ll tailor that consultation and that conversation to you. Well, if you got value out of this video, please give it a like, subscribe. We got a lot more coming as we help you on your journey to scale and grow your business. My name is Mark J. Kohler. Thanks for watching.