Surprisingly good advice from a somewhat unusual source (this guy is a self-proclaimed ‘internet marketing guru’ rather than an attorney, it seems) …
… he says 7 steps, but it’s actually three steps:
1. Separate your personal assets from your business assets – in fact, most of our personal assets are in my wife’s name, not mine.
2. Put your business assets in an LLC – actually, I use a combination of trusts and LLC’s, but this is where a good attorney and accountant comes in handy!
3. Separate your investments into separate LLC’s – I agree with this completely; I have more companies that I know what to do with, each houses just one business or investment (say, one property).
He also glosses over a ciritcal step, if you can swing it (I never did this … but, in hindsight, it’s a wonderful thing to do): separate your business into TWO companies – one holds the client contracts (hence, the revenues), and the other provides management services (hence the costs).
But, here’s the beautiful thing: the management company charges just enough (check with an attorney on how to do this right!) to keep the ‘fronting company’ (i.e. the one with the client contract) at roughly break-even … it’s the one that’s most likely to get sued by customers (those are the expensive law suits!) whereas the management company is the one most likely to get sued by employees.
For information on company protection and charging orders, check out these two links:
http://www.assetprotectionbook.com/charging_orders_intro.htm
http://www.assetprotectioncorp.com/chargingorderprotection.html
The bottom line: DON’T hold businesses or other active investments (e.g. real-estate) in (a) your own name, or (b) as ‘doing business as’ or (c) in the type of entity where the ‘general partners’ are held personally liable for the performance of the ‘business’.
Nice post and video. It gets me thinking about how to legally structure my strategy for growing my side business/perpetual money machine. Here is what I am thinking…any feedback is appreciated AJC. I currently hold three multi-unit (each under 4 units) rental properties two in my name and one in the name of an LLC. I would like to switch all the properties over to LLC’s (ideally their own LLC) for legal protection. Each of these cash flows nicely and will continue to as rents go up. In addition I would like to start an LLC that serves as the manager of these properties (which currently I officially manage though have stable tenants and a nice network of handymen, etc. to call to handle all issues) in order to funnel as much of the cash flow as I can into another business and shield profits from the rentals from taxes (by showing them as payments to the management LLC–i.e. me). Lastly, sometime in the near future, I would like to begin drawing other people’s money in to invest with some of my profits to buy the next property (another LLC); i.e. pooling their money with my money for the 20% down in order to leverage the bank’s money. To do this, I was thinking of starting another LLC that would serve as a Development company. This of course would be where I would make money (charged fee) from the real estate research, investigation, and packaging of deals from the investors (in this case me and the other investor(s)). Any insight on this strategy from you or readers is appreciated!
@ Timmers – This is the time that you need to ‘invest’ in some professional advice, preferably with an accountant or more lielly an attorney who specializes in RE – not somebody who handles the closings, but somebody who routines structures RE consortiums, etc.
In general, though, it’s possible that you will incur CGT in transferring the apartments owned in your own name into LLC’s – this is where you need an accountant’s (or possibly the same attorney’s) advice … if so, it may not be cost-effective to take these protection steps with RE you already own. Another reason to get it right up front, if you can …
As to bringing in partners, you may need a different vehicle than an LLC … perhaps a trust that allows you to be the ‘general partner’ (gives you sole operational control).
Sounds like you are off and running! Good Luck … AJC.
Thanks for the feedback. I had hoped to begin all the RE as LLC’s but legal costs (beginning the LLC) and lending costs (higher rates) mitigated against me doing it at the time. I will definitely need to check with my lawyer about setting up a trust as the structure for the development business.
Cheers! Timmers
For the last 3 years I have had “set up LLC” on my list of things I need to do. This just further reminds me to finally take action on it.
I like the idea of having separate businesses as well, for each “thing” that you do but how practical is that for internet businesses? For example, my makemoneyfromwriting.com is actually a separate deal to my freelance writing business, but considering the costs of setting up LLC’s or other business structures for each, I start thinking it’s a little impractical to do it. What do you have to consider to decide whether you need one blanket LLC for multiple small businesses, or whether it’s best to just start out with separate business structures for each new venture you take on?
@ Debbie – Simple! How big do you expect each to become? If small (contributing only a few bucks each week) then it seems that there is not too much to ‘protect’ so combining seems a good compromise …
So, how does one go about setting up an LLC?
@ Diane – this is a job (a relatively easy one) for an attorney.