Hey guys, Toby Mathis here. And today I want to go over something
that was actually written on a golden snitch in Harry Potter, but it's something that was said
during the movie, as you may recall. He had a golden snitch
that said, I open at the close. And that term was when Harry was close
to the end of his life. And if you know the movie, I'm
not going to spoil it for you. But then when I open up
and there's this resurrection stone set inside, whatever,
it was immaterial. What I liked about it was it set me off
thinking on business planning, because realistically,
when you're setting something up that's going to create a legacy. It does kind of open at the close, right? You're in charge of it
during your lifetime and it takes on a life of itself
once you are gone. I don't want to get too philosophical
about it, but that's essentially
what it all comes down to is when you're setting up a business,
you should be thinking about the end of your involvement with that business
and what's going to happen with it going forward. Hey, guys,
if you could do this for me real quick, if you could like this,
I will bribe you with pictures of my cats like this video. Subscribe and even click that little bell so that you get notified
when new videos come out. So I was on a podcast earlier today
and I was talking with another attorney and it was a podcast
with an attorney for attorneys. One of the things we were talking about
was business planning. Whenever you're setting up a business,
and I always say, Well, it really depends on what you want
to accomplish when you're setting up that business as to what it will look like
when you set it up. So for example,
if I am setting up a business that I know is gonna be very valuable,
my intent is to sell it in 5 to 10 years. There are specific tax statutes
that allow you to avoid all the capital gain on that. If you do it, it's a 12 or two. So and that will dictate
what type of business it has to be a domestic
C corporation, for example. Then all of
a sudden you get you get some benefits or, hey, I'm creating something
that is going to be a family legacy. Hey, I want to create a restaurant or hey,
I want to create a real estate company or Hey,
I just want to manage and have a family corporation that we use to manage
all of our assets. That is really critical
when you are deciding what type of business
you actually want to be. So it was kind of a fun conversation. I don't get to geek out with lawyers
that often on topics like this
other than with our guys. This was somebody from another firm and it was just really interesting
because our philosophies align and we were both kind of doing
this whole thing of like, you know, when you start setting up
a business, you really should start by thinking of the individual
and what they're creating and what kind of legacy they're creating. So it always comes down to the same thing, which is
we cannot think of a single circumstance where somebody is a business owner,
where you don't have a trust involved. You should have absolutely everybody
should have some sort of living trust because otherwise
you're killing that business. You're not giving it a chance
to survive after you. And I don't just say after you. It could be while you're alive
if something happens to you. Like, one thing that this COVID pandemic taught us is that sometimes
we get taken out for a little while. We had folks that were in the hospital
for a number of months, and they still had their businesses
and they still had to operate. And unless they had the correct type of business with the appropriate
documentation in place, some of these people, they were
they had their business destroyed. So you want to allow for other people
to act on your behalf. In order to do that, the business kind of has to be its own
creature, has to be its own person. And I say that person very deliberately
because that's actually what it is, even though it's a corporation LLC
or a limited partnership or a limited liability, limited partnership, whatever
it may be, that's an artificial person. The courts recognize that you can
it can contract on its behalf. It even has some rights
under the Constitution. But it is actually separate from you. Otherwise, something happens to you. It happens to your business. And the way I look at this or something happens to the business
that happens to you. So if you are running your business,
let's say you're a plumber and you make a mistake
and you flood somebody's house and there's insurance coverage,
but they're going after you, too. They're going to try to exceed that policy
and they're going to try to get to your personal assets. You're on the hook. If you're operating as a sole proprietor,
you are not on the hook. If the business is separated from you as an individual
and it's operating on its own and the individual knows
that they're dealing with the business. So, for example, it's ABC Plumbing. You come in, make a mistake,
there's a flood. They're going after ABC Plumbing. You're not personally liable
under those circumstances. Same thing
with most liabilities of a business. You have a breach of contract. Unless you're guarantor,
the business is responsible. Same thing
as if that business has a hardship. It gets shut down. The pandemic affects the supply line. Supply and chain issues cause it to fail
or just bad, bad business practices. It causes it to fail. You need to be able to walk away from that
and not have it affect you individually. What crawls over into your personal life
and exposes all your other assets? So if I'm a soap operator
and I'm operating that that plumbing business, I'm personally on the hook
if I have liabilities of that business and vice versa, I'm the sole proprietor. Let's say that I'll just instead of you
being the party that does anything, let's say it's one of your kids
gets into a car accident, exceeds policy. This happens all the time, by the way. That's usually
when there's a severe accident and all of a sudden
they're looking at you. Guess what?
You and your business are the same. You are no different.
If you have not isolated it. So going back to the Harry Potter thing, you know, begins at the end when we're looking at whether you're
going to be able to pass that on. It becomes a no. It's not even a question. We will never be a sole proprietor
if we're passing that on. If it's going to survive past our death,
we have to create a vehicle. We absolutely 100% have to create
some sort of entity to hold that. When you set up an entity,
there's really three things I look at. Number one, I look at the state,
what type of entities are available. I look at the tax ramification of it, and I look at what's its purpose and
how it's interacting with third parties. So I'll give an example
that if like, let's say real estate, okay,
so let's say it's rental real estate. That's my activity. All right. From a tax perspective,
I really want it to flow on to my personal return so it's going to be
either disregarded or a partnership. I know that if I elect partnership status,
it's probably going to go it's going to go on page
two of my schedule. And from a lending standpoint, I that is better than if it flows on
to my page one from a lending standpoint for underwriting purposes, they can use
100% of the income on a page two on it. If you're page two of your schedule,
as opposed to if it was just disregarded. So there's these little nuances, right? But I want to separate that business out,
that piece of property out. So I'm probably going to go with an LLC
under those circumstances. And let's say
that I'm not looking at a portfolio loan that I want
this really to be a closely held. It's all about me company
and I'm going to put a box around it. And the reason I put a box around
it is because if anything happens on that property,
I want to stay in that property. So if I have a really horrific tenant
or if I have a fire or I have something that occurs on that property,
the most I can get is that property. But they can't take my other businesses,
nor can they take my personal assets. They can't go raid
my personal checking account if something happens on that property
I've isolated. It's a person who's the owner of that
property, the LLC, not me. What if I die? The yellow steel at sea still owns it. It's much easier to transfer that LLC
and I would recommend everybody again. I talked to another attorney, but I would
recommend everybody use a living trust to avoid probate and having to go to court
over these things. It's automatic. Don't have the LLC and the Living Trust. I passed the Living Trust
or am I'm disabled. The Living Trust steps in and says, Aha, here's somebody who can act on behalf
of this entity. Here's
somebody who can act on behalf of Tobey. If it's my entity, I cannot do that. When it's just a sole proprietorship,
everything flows into my personal everything
in my personal flows under the business. By putting an LLC around a business,
at least I am isolating the liability
of that business and keeping it separate from me and keeping me
separate from that business. Now there
are circumstances where somebody can, if they're collecting on a judgment
that I have against me individually, where they will try to foreclose
on those business interests. And that's
where we start looking at jurisdiction. If you've watched our videos,
if you've watched my partner's video, Clint Coons,
if you've been to our courses, you know that we are very bullish
on Wyoming and Nevada because they can never take your entity
away. The most that they can ever take is
they can get a charging order against your interest or your company. And they're standing there and hoping that you give them a handout,
but they cannot force the sale. They can't foreclose on that interest
and they can't get your other assets. That's that's very effective
when you're settling any sort of lawsuit or you're trying to minimize liability,
it prevents it from happening. We use anonymity, too. So we have a lot of security
through obscurity. People can't see it. So they want they don't know it's there. But just if you had that lights out. Bad, bad, bad lawsuit. But the judgment against you and they're really collecting
and they're going to supplemental proceedings
and they're looking for your assets. It's nice to be able to say, hey, you're
never going to get a foreclose on that, even if you get a charging order
against it. If you go through that expense,
you're not going to get anything. You're not going to give it to you. That creates isolation of the asset from you
and you from the asset are from the business
and you and you are from the business. We call that, you know, there's inside
liability and outside liability. Inside liability is what the asset creates
or what the business creates as far as liability, outside
liability is what you create and somebody's
trying to take the business from you. So there's outside the business
liability, i.e. its members or its shareholders or you, and then there's also
then there's the actual business itself. Why do I bring all this stuff up? Why are we even interested in this? It's because when I'm creating a business,
I have to think, Where are we going? If I am setting up a business, for example, on real estate
and I want the depreciation and I have other real estate,
I need to make sure that it's specific type of business. It's not going to be an escort or C Corp,
I'll tell you that. It's going to be a partnership
or disregarded. If I am setting up a business where my intent is, hey, in the first year
I might have some losses. Hey, you know what? I'm really concerned that I'm going
to have some some flow through losses and I want to be able to take them
individually. Let's say I'm opening up a pizza company and I'm buying a bunch of equipment,
a big pizza oven or whatever, and I'm going to write that puppy off
and I want to be able to take that loss. Well, that tells me what type of entity
I'm going to be. If I want that loss, I'm going to either be a disregarded entity,
a partnership, or an S corp. I'm not going to be a C Corp
under those circumstances. Flip it around and you say, Hey,
I want to build value in this company. It's going to be worth a lot of money. Like I'm putting I'm building up
the intellectual property. We're coming out with a software as a,
you know, as a solution. And I'm going to have this valuation. And I know that when I sell this thing,
it's going to be seven figures, eight figures, nine figures,
whatever it's going to be. And I want to make sure that I don't pay
a ton of tax when I sell it. Maybe I can avoid 100% of that tax
using a 1202 deduction. That tells us
it has to be a domestic C Corp. You're going to see an accountant or
what are they going to tell you? Nine times out of ten
they're going to see an LLC taxes and that's corp when they hear business
or the vast majority of people are set up as a sole proprietorship, it's actually about 70% of all the businesses out
there, as are sole proprietors. You just nixed your ability to do that. That's why you look and say,
What's the intent over time? Hey, I want to create a legacy
for my family. Okay, so proprietors off the table done has to be an LLC corporation, C
Corporation, maybe a limited partnership, maybe a limited liability partnership,
limited liability, limited partnership. Like there's different different flavors
depending on the type of business you're in,
what type of licensing you have. But for the most part, it really comes
down to a simple choice LLC or Corp LLC taxed as a Corp corporation, taxed as an S Corp C Corp, possibly, depending on what you're doing,
even a profit. And you're looking at saying
what is your intent with that business? So I'll go back again. Let's say that we're developing,
hey, man, I'll do the plumbing company. I'm going to set up a plumbing company.
Here's what I'm doing. Hey, do you need to take the money out
or you're going to be required to be taking distributions? How much do you intend to make? What's you know,
do you have other sources of income? Hey, yeah. My spouse is a surgeon
who makes a ton of money. Okay, maybe we want to say, hey,
you know what? At a minimum,
let's just keep it off of you for now. Hey, my spouse is a surgeon. She's going to retire in five years
or we're getting close. I'm starting this business up. It's going to be okay, but I'm really just
setting it up because I'm bored. Okay, then we might want to set it up
as a C Corp. Do it over here. Keep the keep as much of that
income off of your return as possible since you're not living on it. Hey, I want to do this,
but I need to live off of it, okay? Now we're just doing a comparison. If if I was going to
just take all the money, like, hey, your accountant says,
Oh, just be a sole proprietor, then I'm looking at it saying,
All right, number one, sole proprietors out the door. Right. Just a flat,
straight out, sole proprietor. But we could be an LLC
that's disregarded for tax purposes. Now let's say, hey, it's making $100,000
a year. I'm going to live off of that sole
proprietor versus A. S corp. You might save $10,000 a year by setting
up an S corp just on self-employment tax, just by taking a small salary. Plus, you get the accountable plan. If you don't know an accountable plan,
watch some of the videos. It's huge tax benefits that are not
available to sole proprietorships. Plus sole proprietorships are audited. Many cases, $100,000. You're probably looking at about 1600
percent higher than that an S corp. As far as the audit rate, it's
astronomically higher and sole proprietors lose 94 to 95% of their audits. Why? It's because the accountants
always say, oh, the less formalities and you don't have to do anything and
we just open it up, operate your business. Unfortunately, that's not accurate. All businesses have to keep the same type
of books and records and keep record of their income
and their expenses. And you still have the same requirements. It doesn't matter whether it's Finance Corp, C Corp, LLC taxes,
and that's Corp LLC taxes. A C Corp
disregarded LLC is sole proprietor does not matter
business trash does not matter. You still have the same recordkeeping
requirements with the IRS. They do not care what it is
they're going to say. These are the
these are the records you have to keep. So what happens is people think
that it's relaxed on an honest, sole proprietorship.
Oh, it's so much easier. I know you don't have to do all this. You can have the same bank
account, blah, blah, blah. You're going to lose that audit
on 95% of the time. And the reason being
is because you're not operating as a separate person,
you're operating as you. So the IRS correctly says, hey, it's you, we're not going to give you
those deductions. The rules are different
for a sole proprietorship than an escort, where you're an employee
of the organization, you're an employee of the organization. All of a sudden you have accountable plans
unlocked for you, and you could do everything from 100%
reimbursements to things like cell phones, data, even a portion of your house to it. All these things get opened up for you. Where are you going
to get a lot of other deductions? So when you just looking at it
as a comparison. All right, we're setting up our company.
We're making 100,000. You do it this way. You're going to pay too much in tax. You're going to get audited a lot. It at least we could do
is isolate that liability. Then we look at the tax and we say, that's
not even close. You should be an escort. Mercy Corp. Do you need the money? Yes. Then let's probably be an escort. I don't need the money or I have. I have other deductions
that I might be able to use. Maybe I can make this
a multipurpose entity. I'm going to do two or three things inside that business
to meet my family corporation. Great that it might be a C Corp. Hey, I'm setting up a business that we're going to sell
and we're going to shoot for ten years. We're going to develop all this stuff.
I don't want it in my family. I'm not creating a legacy. This is something I'm literally just
setting up to build value in and sell. I'm going to be a C Corp. We're going to look at 12 or two
real close or, hey, it's speculative business. I don't know
whether it's going to make money. I'm going to put some money into it. Do you need the loss? No, I'm just going to put money
into it. Great. Maybe we're going to be a C Corp and we're
looking for 1244 stock lost ability. All of those things come into play and we have to know what the end is. If you're creating a legacy
with your entity, hey, I'm creating a family company,
I'm making a family corporation. It becomes really, really small. We need a trust as a vehicle at a minimum period and a story
everybody needs to trust. If you're gonna be a business owner,
if you're creating a legacy, you don't get to use the will
because wills die and distribute. It's not going to be the vehicle
that you need. You want to create something
that's going to be generational. You're going with the trust
everybody has different names for it. You know, living trust, Dynasty Trust, all this, you know, they're different
terms for the same thing. It's trust don't complicated grantor trust period becomes irrevocable once you die. Don't make it
any more complicated than that. Okay. It's going to last,
you know, two 300 years. Fantastic. Then that's what we're going to do. There's not another vehicle. It really comes down to just one. It's going to hold
the business type of business. It depends on the activity. Hey, if I'm real estate, I might be
doing something different than if I like. If I'm a real estate agent,
even I might be doing something different than if I'm a mortgage broker,
which I might be doing something if I am investing or running an Airbnb. All of those activities
have different nuances. And if anybody tells you, Oh, this is what you do with all of them,
that's, you know, fire that person. It's facts and circumstances. You know, a lot of it has to do with
what your intent is over a long period of time, begins at the end. We've got to be thinking about the end to determine what we're going to do
in the very beginning. Follow that advice. You'll be very, very happy. You'll be or you'll be able to take advantage of things that other people don't realize
or even exist. You'll be able to avoid liabilities
that you didn't anticipate that actually are real, and you'll be able to create a legacy
if that's what you want, or you'll be a find a appropriate vehicle to have an exit
that does not tax you if you want. It all depends on what your intent is
and what you're creating. It begins at the end.
