Transcription Episode 029

Laubscher: This is Cashflow Ninja episode 29 with Garrett Sutton.

Welcome to the Cashflow Ninja, the podcast empowering and inspiring people to discover how to generate their own income and manage, grow, and protect their own wealth in the new economy. Now, here is your host, M.C. Laubscher.

Laubscher: Hi, everyone, M.C. Laubscher, and welcome to another episode of the Cashflow Ninja. So today's episode is probably one of the most important episodes that you will listen to if you want to be successful in business and investing. Business and investing are team sports, and one of the most important team members on your team is your legal advisor that's gonna assist you with your business entity and asset protection strategies. This includes covering your assets. We live in an extremely litigious society, and as economic times get harder and tougher, which they will, there will be an increase in lawsuits.

I really want you to take this seriously because what is the point of working so hard to create assets that provide so much value for others if they can be taken away from you because you did not have the correct asset protection strategies in place? You know, Mark Cuban said, “No one cared about him when he had no money, but as soon as he became wealthy, the lawsuits started to pile up.” And Donald Trump once said, “You wanna sue me? Okay, get in line.” My point is that you don't have to be Donald Trump and Mark Cuban to get sued. If you have, for example, one investment property and a business, even if it's a small business, you can get sued. I'm honored today to have Garrett Sutton on the show.

Garrett is a nationally-acclaimed corporate attorney and asset protection expert who has written a number of books guiding entrepreneurs and investors. Garrett's bestsellers include “Start Your Own Corporation”, “Writing Winning Business Plans”, “The ABCs Of Getting Out Of Debt”, “Run Your Own Corporation”, “Buying and Selling a Business”, and “Loopholes of Real Estate”, and Robert Kiyosaki's “Rich Dad Advisors” series. Garrett is also the author of “How to Use Limited Liability Companies & Limited Partnerships”, and a co-author of “Finance Your Own Business”, and most recently released “Toxic Client”. Garrett enjoys helping entrepreneurs succeed. He has over 30 years of experience in assisting individuals in businesses to determine their appropriate corporate structure, limit their liability, protecting their assets, and achieving their goals.

Garrett is also the founder of Corporate Direct and Sutton Law Center, which since 1988 has provided affordable asset protection and corporate formation and maintenance services for investors around the world. His articles and quotes have been published in The Wall Street Journal, New York Times, cbs.com, time.com, and credit.com. Garrett is also a former rugby player, just wanted to throw that in there, too. So before we're joined by Garrett Sutton, just a reminder that you can download any book for free when you try Audible for 30 days. You can grab your free trial and audio book download at cashflowninja.com/freebookdownload.

And my friend Minesh Bhindi from Gold Silver For Life is hosting a webinar, “3 Steps To Cash-Flow Gold & Silver”. Minesh has shown people how to use their gold and silver holdings to create income streams. You can register for the webinar at cashflowninja.com/goldsilverwebinar. All of our pod shows and show notes are available at cashflowninja.com, and you can join our community and mailing list by texting the word CASHFLOWNINJA, one word, all capitalized, to 44222, that's two fours and three twos. If you sign up to join our community, I will email you 3 of the top 10 books ever written on building wealth.

John: Hey, this is John Lee Dumas from Entrepreneur On Fire and you're listening to the Cashflow Ninja podcast with your host, M.C. Laubscher. You must be prepared to ignite.

Laubscher: Garrett, welcome to the show.

Garrett: Thank you, M.C. It's great to be with you.

Laubscher: Can you please share a little bit about your background and your journey in the world of corporate law and also as an investor and an entrepreneur?

Garrett: I started in the bay area. I went to Cal and then went across the bay to Hastings College of the Law, the University of California's Law School in San Francisco. And I always liked corporate law. The very first class I took I knew that I enjoyed this area. And so I came to Nevada in 1989, two weeks before the earthquake. You remember the world series with the Giants and the ace? I moved up here two weeks before that. And my friends all said, “How did you know?” But I really enjoy living in Reno and the Sierra, taking advantage of Lake Tahoe. And I started practicing corporate law in Nevada. Nevada has probably the best corporate law in the country now, and I started investing in real estate here in Reno, and it's just been a great journey.

Along the way, I became associated with Robert Kiyosaki in the Rich Dad Advisors group, and I've been able to travel the country and travel to certain parts of the world talking about asset protection because it's applicable all over the world. There is a great increase in litigation in Europe, and we were just in Chile and there's a lot of litigation going on in Chile as well. So people need to protect themselves no matter where they are.

Laubscher: Protecting your assets is so crucial in today's litigious society. And just putting all your asset at risk is almost irresponsible, so you're definitely one of the most important members on your team. Now, as far as asset protection and business entity strategies, every investment situation is unique, and there are many variables and factors in every case. Can you provide a general example for someone that's buying their first real estate investment property with a partner? What lines of defense they can set up to protect their investment and their personal assets?

Garrett: Well, you're right, M.C., everybody's situation is a little bit different, but in general terms, you and a friend are gonna buy a duplex, and I like having insurance. Insurance is the first line of defense. I would never tell someone not to get insurance on that property. But secondly, you need an entity to protect yourself. That's the second line of defense. So if the duplex of a tenant falls and if something bad happens at the property, you hopefully are gonna have insurance cover that claim. But insurance companies have an economic incentive not to cover every claim, we know that. And so you need the second line of defense. If that tenant sues, the insurance doesn't cover the claim, then the tenant can reach what's inside the LLC that holds the real estate.

Importantly, they can't reach beyond the LLC to get at your other personal assets, your other investment assets. They can get what's inside the LLC, the equity in the duplex, but they can't get beyond it. And I think that is something people need to appreciate right when you're starting out. Right when you're buying that first property, you wanna be able to protect yourself right from the start. Because if someone gets a claim against you as an individual and you say to yourself, “Well, I don't have any assets.” The point is that you will be gaining assets into the future. That person who sued you can extend that judgment for seven years at a time, that judgment can follow you for a period of time. And so you want to protect yourself right at the start even though you don't have a lot of assets right at the start.

Laubscher: Right. And that's so important, because one thing that you've mentioned in your talks is that you cannot go back and fix it. So if you're trying to buy car insurance after the accident. So, for example, if a tenant slips and falls in a bar of soap and now is suing you and your partner using that same example and you didn't have something set up, you can't go back. But that's very interesting to note that they could still extend it for seven years into the future.

Garrett: You can renew a judgment in most states every seven years. So the person sues you individually, they can't get at your assets because you don't have a lot right now. But they can continue to try and collect for seven years and then go to court and renew it for another seven, and another seven. You don't want that hanging over you. It's much better, and it's certainly very inexpensive, to set up the LLCs right at the start and be protected and have that peace of mind that if something bad happens, they're not gonna be able to reach everything you own.

Laubscher: Now, if you're properly set up and you have your asset protection set up, what are some of the options for them in the litigation at that stage if you're properly protected?

Garrett: Well, say, in our example, that the tenant is suing over something that happened at the duplex, hopefully insurance is going to cover it. If it doesn't, they can get the equity inside the LLC. So, for example, the duplex is worth 200,000 and you have a first deed of trust to the bank of 100,000. Well, the bank has first dibs ahead of any lawsuit. So the tenant can get the 100,000 in equity in the property. Now, to get that, they're gonna have to foreclose upon the property, sell the property at a fire sale, pay broker's fees and all. And maybe they're not gonna get 100,000, maybe they're only gonna get 40,000. And so does an attorney wanna go to the trouble for that? Some would, some wouldn't.

I like the option of having plenty of insurance to cover any claim. I recommend all my clients, M.C., get umbrella policies of insurance. Because if you get in that horrific car wreck, I like having an extra million or two to cover that. And that pot of insurance money is something the attorneys how to get at. They're not so good at going after LLCs. So in that case, having enough insurance money is something the attorneys will be able to access and it will throw them off the track against going against your other LLCs. So it's a whole coordinated effort that we sit down with our clients, it's usually over the phone, and talk about how we can best protect all of your assets.

Laubscher: The following question might also be, “It depends,” question, but there are situations…a lot of folks that I have discussions with talk about a series LLC. Now, are there certain situations that you advise people to put a property in one LLC versus separate LLCs, and then where does a series LLC come into this?

Garrett: Well, M.C., the series LLC is a new entity. I don't set them up. I need to see some court cases that really will carry through on what the promoters say these series LLCs do. First of all, they're only approved in about 17 states. And so the problem you have is someone setting up a Nevada series LLC and trying to use one of the series in California, which doesn't recognize the series LLC. So there's some problems associated with the series LLC, still. In fact, the American Bar Association got all the brainiac LLC lawyers together and looked at the series LLC and declined to endorse them. There are just too many problems associated with them, too many unknowns.

And so when the top attorneys say, “We're not going to endorse these series LLCs,” that's good enough for me. The better way to do it, in my opinion, is to have separate LLCs for various properties that we know will protect you. If you have a property in Pennsylvania in a Pennsylvania LLC, and a property in Utah in a Utah LLC, we know that you're gonna be protected. If you get sued on the Pennsylvania LLC, they're not gonna be able to get at the property in the Utah LLC, it's a separate entity. We don't have that certainty with the series LLC.

Laubscher: When we're considering corporate formation, there's usually three very important considerations, asset protection, the tax treatment of the entity, and the anonymity it offers. Can you talk about the four good business entity structures that you helped clients set up and the value that they offer in these areas?

Garrett: Okay. The four good entities are…we have corporations. We have two types of corporations that are taxed different. We have the C corp, which stands for an IRS code section, that has double taxation. The S corp has flow-through taxation. It's like a partnership. It's not taxed at the entity level, the corporate level, it's just everything flows through to the individuals. Then we have LLCs, which stands for limited liability company, and limited partnership, or LP. The LLCs and the LPs offer charging order protection which offers the good asset protection. Now, the charging order varies from state to state. California and New York are very weak, Wyoming and Nevada are very strong. So we have to plan for each individual which LLC and which state we're going to use to get that asset protection.

You mentioned anonymity, and Wyoming is great for that. Wyoming on their LLCs does not list who the owners or managers are of the LLCs. So we like Wyoming not only for the superior asset protection but for the anonymity it offers. As well, the filing fee, the annual fee is only $50 a year, so it's very inexpensive to have these Wyoming LLCs. The corporations have their place. In some states, for example in California, to be a licensed professional, a lawyer, or a real estate broker, you pretty much have to use a corporation. You can't use an LLC, especially for real estate brokerage. So in that case, we use a corporation, and tax-wise, the S corp works best for business owners.

The C corp has that double taxation. The S corp has the flow-through. We can minimize payroll taxes with the S corp. One thing you wouldn't do, M.C., is you wouldn't put real estate into C corp. That double taxation will kill you on a sale of the property. For example, a $400,000 gain on the sale of real estate, you'll pay over $90,000 more in taxes if you use the C corp instead of an LLC. So, well, Uncle Sam wants you to invest in real estate through a C corp because they're gonna make so much more money on you. An investor is gonna know you don't know what you're talking about if you suggest putting real estate into a C corp. So we won't use a C corp for real estate. The C corp really comes into play if you need a management company and you want to be able to write off your health insurance.

The C corp has its place, but for most of my clients, M.C., they're setting up either LLCs with the flow-through partnership taxation, or LLCs that are taxed as an S corp for business that seems like a good way to go. So as you can see, there's no one right answer here. There are a lot of variations and variables. And so that's why we typically get on the phone with people and talk through their specific situation and set up the right structure for what exactly they are doing.

Laubscher: That's very interesting. Now, I have listeners all over the world for the podcast as one. Some of them are interested in investing in the United States. What asset protection strategies are available to them to invest in the United States?

Garrett: Well, M.C., we deal with a lot of investors from overseas, and the typical choice is the LLC, but we have to work with your local tax advisor. Because, for example, in Canada…the LLC for the U.S. doesn't match up with Canadian taxation. So for Canadians, we do either a C corp in the U.S. that flows into a Canadian corporation, or we do the limited partnership where we have a limited partnership in, for example, Wyoming, and then you have to have another corporation be the general partner. And that seems to match up well with Canadian taxation. For our Australian clients, especially people investing through the superannuation, the retirement funds, LLCs seem to work well.

So frequently, we get on board with the home country tax advisor, because that's the main thing is making sure that we can flow the money from the U.S. to them back home in the best tax-advantaged way. So we'll work with your home state or home country CPA, come up with the best structure, and then you're free to invest in the United States. And just like any other American, you want to have asset protection because we are a very litigious society.

Laubscher: Now, another important point that I wanted to make to our listeners, also, is that asset protection and business entity structures do not only just apply to real estate and businesses but you can also hold brokerage accounts as a legal entity for paper assets and commodity brokerage accounts and trading accounts, as well as oil and gas. Can you talk about this briefly?

Garrett: Sure. I think it's really prudent to have your brokerage account be in the name of an LLC or an LP. If you get sued personally in a car wreck, for example, they can go straight at that brokerage account if it's in your individual name. They're gonna have a much tougher time getting at that money if it's in a Wyoming or Nevada LLC. So for a brokerage account, I always recommend an LLC for gold and silver, for Boolean, precious metals. An LLC is really appropriate for protection because if you get sued and you walk into court for the debtor's exam where you've been sued, there's a judgment against you.

Then you have to go back into court and they get to ask questions about what you own. And when you walk into court you go to tell the truth. When you walk into court and say, “My assets are held in LLCs,” it's really tough for those people suing you to get at those assets if you're set up properly and in the right states. Now, with oil and gas there's a little wrinkle. In order to get the tax benefits you really have to be listed as a general partner of that syndication. Then once all the tax benefits are used up you just have the syndicator switch you to become a limited partner.

But if you're in it for the tax benefits, you're gonna be a general partner, which means you're personally liable if something bad happens. So you want to make sure that oil and gas promoter has plenty of insurance on the oil field so that if something catastrophic happens, you're not held personally responsible with all the other general partners. Then once the tax benefits play out, then you switch to a limited partnership position, and from that spot you're protected.

Laubscher: Now, I get that the law is also constantly evolving and changing in all areas. It's a very dynamic field. What are some of the latest developments and changes in the asset protection world?

Garrett: Well, that's a good question, M.C., because it does change all the time. And one of the big trends we're seeing is that some state courts are not protecting the single-member LLC, meaning an LLC where there's just one owner. There was a big case in Florida where Mr. Olmstead, who was ripping people off, had a single-member LLC, and the person coming after him, the party coming after him, rather, was the federal government. Hence, they have the resources to throw at a case, and they took it all the way to the Florida Supreme Court and they said, “Yes, we are not going to give the charging order protection to a single-member LLC.”

And you can understand the rationale for that. The purpose of the charging order, the lean on distributions is to protect the innocent partner, right? If your partner gets sued and the person suing him wants to go in and force a sale of the assets of the LLC, well, that's not fair to you, M.C., the innocent partner. You didn't do anything wrong.

Laubscher: Right.

Garrett: So that's why the charging order is there is to protect the innocent partner. Well, in a single-member LLC, there is no innocent partner. It's just you, right? The claim is against you, and the courts are saying, “Well, why should we allow for a charging order when there's no innocent partner to protect?” And so some courts as switching and saying, “We're not gonna protect a single-member LLC.” Interestingly, Nevada and Wyoming in response to this have changed their law to say, “We will protect the single-member LLC. We think people deserve this protection whether it's a single-member or a multiple-member LLC.” And so that's why we like setting up in these states.

So this trends against a single-member LLC is spreading, and so if you don't have a Nevada or Wyoming LLC, another strategy is to have a multiple-member LLC. Have your kids own 5% of it. Or a cousin, or a charity, or whoever you want. Instead of having just a one-owner LLC, you add a second member. It should be a 5% owner. You wouldn't give a one-tenth of 1% ownership out. I don't think the courts would support that. But a 5% ownership stake to someone else to make it a multiple-member LLC can be a good way to go. But given the choice, I mean, why give up 5% if you don't want to? I would set up a Nevada Wyoming LLC because they do protect the single-member.

Laubscher: That's very interesting. So a lot of people out there that thought they did the right thing and put it in an LLC are now finding out that they didn't necessarily have the protection that they thought that they have.

Garrett: Well, you know, it's like you said, it's an evolving area. So our job is to let people know what the trends are and you can act accordingly. If you feel confident that you wanna be a single-member LLC and you're not worried, then that's fine. But our job is to let you know that you may wanna consider having a second member or having all your LLCs across the country owned by one, for example, Wyoming LLC, which will give you the good asset protection.

Laubscher: Now, Garrett, one habit I've observed from wealthy and successful people is that they're always studying new subjects and learning new skills. What are you currently studying and what new skill sets are you currently learning?

Garrett: That's a good question because learning never ends. And one of the things I'm working on right now is just this whole website thing, website marketing. Because I used to go around the country and give seminars and all, and it was kind of exhausting, and I like being at home with my kids. And so in place of that, I think that the internet is the way to get the word out about services. So we have a very good person that helps us with our internet marketing, but I've been studying that area and learning about it.

And then being one of Robert Kiyosaki's advisors, he has a study group twice a year. So we're always studying books, and getting together, and digging into the books, and talking about them. It's a great way to learn about a topic to not only read it but to sit down with a group of people and talk through it. So that's ongoing as well.

Laubscher: That's fantastic. I've heard Robert talk about that, that group that gets together, and read a book before, and that's fantastic.

Garrett: Right.

Laubscher: Now, on your journey as an investor and a business person, what is the best advice you've ever received and some of the most important lessons you've learned?

Garrett: Well, to be an investor, you just need to get out there and invest. One of the things I learned from Robert is that you, at some point when you're ready, you've got to get out there and invest and not worry that you're gonna make a mistake or two. That's just part of the natural process of learning and investing is making a mistake or two and learning from those mistakes. So having been around Robert now for 15 years, I've learned a lot of lessons from him. He's just a very fascinating and engaging mentor. And so the big one is, though, is just if you're gonna invest in real estate, start with that first small property and do it. Don't wait until you think that the timing is absolutely perfect. It's never absolutely perfect. So just get out there and get involved with investing, and you will learn and benefit from that process.

Laubscher: Now, Garrett, one question that I ask my guests is if you cannot pass on money to your children, or grandchildren, or future generations, and you are only allowed to pass on five principles to them to build wealth and achieve success and happiness, what would they be?

Garrett: Well, I will partly follow up from the last question. I would tell my children, and I'm working on it now, that they need to read about the topic. They need to get educated. If possible, they need a mentor, and then, like I was just saying, you need to do it. You need to get out there and really be involved in the experience of investing. Then you need to just make sure that your money is working for you. When you invest, you need to invest for cash flow. And so just make sure that the money is working for you. And then the fifth thing, for me, everything is about integrity.

I want my kids to be known as people with integrity, people who do not lie, who do not shade the truth, who will be upfront about everything. Even if things are bad, you've got to tell your investors, you've got to tell your other business partners the truth at all times. So integrity would be the fifth thing I would try and pass on to them.

Laubscher: Thank you for sharing that. Now, we spoke about studying books with Robert Kiyosaki. Are there any books that you would recommend that you read and studied lately?

Garrett: Well, if you haven't read “Rich Dad Poor Dad”, I think that's a great foundational book for people to read. And if you're gonna be investing in real estate, my book “Start Your Own Corporation” and “Loopholes of Real Estate” are two good books to read. Kenny's book, “The ABCs of Real Estate Investing”, Tom Wheelwright's book, “Tax-Free Wealth” are all good books in the Rich Dad Advisors series to read. So there's plenty of books out there. Some of them I don't agree with, but within the Rich Dad Advisors series, I've had to edit all of them. So I know that they're good and they don't make statements that aren't really accurate.

But what you read is important, and I think you need to engage in critical thinking and just make sure that you're comfortable with what the author is saying. Because some of these books are really just sales material to get you to do something that the author wants you to do. So when you're reading, engage in critical thinking because some of these books I see are just really glorified sales brochures. So just be careful in that regard.

Laubscher: Right. And to [inaudible 00:31:22] the topic of the Rich Dad Advisors I really enjoy. So are you guys have a website where… The advisor's post blog post on a weekly basis, I would highly recommend that. That's a fantastic resource.

Garrett: Yeah, thanks, M.C. We got some good articles in there for people, and they're free. There's no requirement of anything. Just sign up and you get the articles.

Laubscher: Now, Garrett, how can my audience learn more about you, your company, and keep informed of all of the projects that you are involved with?

Garrett: Well, M.C., the best place to start would be our main website, which is corporatedirect.com. And we have a lot of information and articles there. We have a newsletter that comes out free. So there's a lot of great information there. If you want a free 15-minute consultation with one of our incorporating specialists, you can call 800-600-1760. If you're overseas, that number probably doesn't work, so you can certainly go to Corporate Direct and sign up for a consult there as well. But that's the best way to get in touch with us, and we look forward to working with people all over the world to protect them when they're doing business and investing in the United States.

Laubscher: Well, Garrett, thank you so much for coming on the show and sharing your journey and your knowledge of this extremely important part of business investing and of our lives. Thank you so much.

Garrett: It's been a pleasure, M.C. And good luck to you and all your listeners in their investing.

Laubscher: Thank you for joining me and my guest, Garrett Sutton, the founder of Corporate Direct and Sutton Law Center. Remember to grab your free book download from Audible. You can download any book for free when you try Audible for 30 days. You can grab your free trial and audio book download at cashflowninja.com/freebookdownload. And just a reminder to sign up for the free webinar that my friend, Minesh Bhindi from Gold Silver For Life, is hosting. “3 Steps To Cash-Flow Gold & Silver”. Minesh has shown people how to use their gold and silver holdings to create income streams. You can register for the webinar at cashflowninja.com/goldsilverwebinar.

All of our pod shows and show notes are available at cashflowninja.com. And you can also join our community and mailing list by texting the word CASHFLOWNINJA, one word, all capitalized, to 44222, that's two fours and three twos. If you sign up to join our community, I will email you three of the top 10 books ever written on building wealth. As always guys, if there's any way that I can provide more value to you and serve you better, please go to our contact page and send me an email or leave me a voice mail on our speak pod voice mail line. That's our show for today, until next time. Live a life of passion and purpose on your terms.

Man: You have been listening to the Cashflow Ninja with your host, M.C. Laubscher. The podcast empowering and inspiring people to discover how to generate their own income and manage, grow, and protect their own wealth in the new economy. Today's show notes and resources are available on our website, cashflowninja.com. This presentation is for educational and information purposes only. The information being presented and considered does not consider your particular financial objectives or situation, and it does not make personalized recommendations.

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