Foreward

Intro

• Own nothing and control everything

Chap 1 – Entity Menu

• Six choices: C-corp, S-corp, LLC, LP, GP, sole prorprietorship
• What is considered
  • Protection of family assets
  • Management Ctrl
  • Avoid family dispute
  • Flex of decision making
  • Succession / Estate Planning
  • Nature of business operated, assets held
  • Number of owners
  • Funding / Raise Capital
  • Tax
  • Privacy of ownership
• Sole Proprietorships & General Partnerships no asset protection
• General Partnership is worse than sole proprietorship because you are also responsible for your partner’s acts 
  • Whenever two or more persons agree to share profits and losses a partnership has been formed. Even if you never sign a partnership agreement, state law provides that under such circumstances you have formed a general partnership.
  • Only handshake needed!
  • State by state interpretation of profit sharing, not case specific, 50-50 instead of 75-25 for example
  • Never become GP of business without day-to-day control
  • GP has self-employment tax

Chap 2 – Good Entities

• Form corp – creating a independent legal entity with life of its own
• C-corp could be taxed twice
  • To avoid double tax, most C-corp use write off to reduce profit to zero in net income
  • S-corp can flow-thru
  • S-corp owner < 100 owners, must be US citizen/resident aliens, Corp/LP/Multi-member LLC may not be resident alien
  • Go public need a C-corp
• LLC
  • Flexible allocation of PnL – beyond shares of ownership
    • Special Alloc – need a “substantial economic effect” to be accepted by IRS
    • Include special language in LLC’s Operating Agreement to ensure future special alloc has substantial econ effect
      • Something about capital account / liquidation of it / negative capital account payback
  • Can be personal liable if you sign personal guarantee
    • Example: office lease / loans from SBA
    • By signing an agreement “Joe Doe” without adding “Manager, XYZ, LLC” you can become personally liable.
  • Flexible management structure
  • Prepare annual minutes (notes of annual meeting) to avoid piercing thru corp veil
  • Canada – only two province have LLC, most people with LP
  • Pass-thru tax entity
  • LLC itself is a relatively new entity, not as much court rulings as corp
  • Be careful when using LLC in California! LOL – big cost when establishing LLC in California + gross receipt based tax
• LP
  • Limited Partnership has “GP + LP”
    • GP similar to General Partnership, but can use Corp/LLC as GP
  • Retained Management – GP determines how things are run, LP receive the benefit
    • Estate Planning Application – give interest in LP gradually each year tax free to children
  • Restrictions on Transfer
    • Some rules of limited free transferability can be constructed
  • Charging order on LP
    • Charging order are not favored by creditors because it forces them to wait to be paid (Lawyers on Contingency don’t like to wait for $$)
    • State of Nevada / Wyoming offer best charging order protections, California offers weakest protection
      • Strategy – form LP/LLC in Nevada/Wyoming then qualifying it in California. (if you want to do business in California)
  • Family wealth transfer
    • Discount for LP interest is allowed (because LP cannot manage the Limited Partnership)
      • Which means more can be gifted after using discount tech
      • Author doesn’t advise clients to discount more than 33%
  • Flow-thru tax
  • Family limited partnership – scam
    • There’s people selling it, frame it as “bullet proof, super secretive” lol – maybe good idea

Chap 3 Corp or LLC?

• LP requires a LLC/Corp as GP for maintainence
• Pros/Cons of each entity
  • S-corp : Charging order protection for corp shareholders (S&C) with Nevada
• Operate business
  • Payroll tax – FICA & Medicare
    • C-corp high salary to avoid double-taxation
    • LLC – subject to payroll tax for LLC members active in business
    • S-corp: salary has payroll tax, profit doesn’t
  • Business Debts
    • In LLC, members get benefits of business debt (regardless of personal-guarantee), raise the tax basis, and can have more tax-free profit?
      • How does business debt raise tax basis – https://www.mintz.com/insights-center/viewpoints/2911/2019-02-01-llcs-and-convertible-debt-too-good-be-true
      • Taking business debt in LLC increase member’s basis – reduce capital gain!!
      • But repayment of debt may result in “capital gain” – interesting…
    • S-Corp  – unless personal guarantee, no such tax benefit
  • Fringe benefits
    • C-corp can write off employee’s Health Insurance Premiums and group term life insurance / medical reimbursement plans – S-corp cannot
  • Owner Flexibility
    • S-corp is not flexible
      • No foreign owners
      • No trust
      • No multiple classes of shares
• Hold assets – generally better protected using LLC instead of corp
  • Example using a LLC vs. Corp to hold fourplex, there’s a car accident and creditor want personal assets
    • Corp (unless nevada), creditor get 100% share of the corp, can sell the house
    • LLC (especially nevada / wyoming), creditor can receive money distributions but can’t take membership interests & force sale.
      • If LLC doesn’t make distribution, nothing reaches creditor
      • Additionally, creditor will pay tax, if nothing is distributed, creditor has phantom income and need to pay tax on money he hasn’t received
      • Some States (CA/CO/FL/ID) no charging order protection for single-member LLCs
  • Separation of assets into diff compartments
    • You don’t want a lot of assets in a corp that deals with public and is subject to be sued
  • Series LLC – doesn’t make sense per author
    • Promoted as state-fee-saving device
    • California is taxing each cell of series-LLC LOL
  • Tax
    • Transfer asset in/out of the entity
    • LLC is preferred here

 

Chap 4 – Using Neveda / Wyoming Entities!

• Nevada/Wyoming no state income / corp tax
• Strategy 1: Doing business in your state
  • Nevada Corp Laws
    • No sharing Corp Info with IRS
    • Privacy: used to be completely confidential – now somewhat comprimised
      • Note: 
        • 1. Ownership is confidential until there’s trouble
        • 2. Trouble has to be big
      • People greatly concerned about privacy may want to use Wyoming entities
• Strategy 2: Doing business in your state and in Wyoming
  • Save state tax
    • Save state tax by having Wyoming Corporation do the service
  • Asset Protection
    • Local State LLC do the day-to-day, while all the money in Wyoming LLC
  • Lower Corp Tax – controlled group rule
    • Profit engineering in each entity to minimize corp tax
    • Controlled group status – some loopholes can avoid the controlled group status (dynamic though)
• Strategy 3: Doing business in your state, borrowing money from Nevada, Inc
  • Encumber the assets in borrower, more safe from creditor
• Concerns when transfer assets
  • Fraudulent Conveyance
  • Bearer Shares – privacy of owner of share – outlawed in Nevada / Wyoming
  • Money Laundering 

Chap 5 Charging Order

• Charging Order / LLC or LP
  • Not make distribution as protection
  • Phantom income to make creditor pay tax on gain

Chap 6 Cross State Line

• Stealth vs. Structure
  • Land trust not recommended
• When need to qualify business for state

Chap 7 Professional Corps

• Professional corporation protection is limited
  • Usually licensed profession : i.e. doctors
  • Not protect against negligience / malpractice -> Personally liable

Chap 8 Organizational steps for forming Corp/LLC/LP – skipped

Chap 9 Importance of Corp Formalities

• Don’t see corp assets as your own, don’t co-mingle, annual meeting important

Chap 10 Business Tax Deductions

Chap 11 Building Corp Credit

• Business Credit Vendor
  • D&B, Experian, SBFE/Equifax
• Level-1 : Whatever it takes
  • Personal Guarantee
• Level-2 : Wising Up
  • Business Credit Card
  • Not on personal credit report unless default, may have to personally guarantee
• Level-3 : Established Business Credit

Chap 12 Insurance

• Real Estate Insurance
  • Replacement cost vs. current value – replacement cost might be better
  • Liability Insurance
    • Many liability protection also gives insurance’s legal team on your side
  • Director and Officer Liability Coverage
• Read the fine print

Chap 13 JV

Chap 14 Raise Money!

• Sell share of company – SEC
  • Some states not only require federal disclosure but also require merit review
• Rule 506 / Reg-D offering for private-placement
• When non-accredited investor being solicited, the disclosure required is more

Chap 15 Voting Trusts – to maintain control

Chap 16 Know Director & Officers

Chap 17 Buy-sell agreement

Chap 18 Protect from Scam

• Avoid asset protection scams

Chap 19

Chap 20 More Misc Traps

• Accumulated earnings – more than 250K is tricky

Chap 21

• Reliable resident agent – to know you’re sued and have a chance to defend yourself