How the right LLC structure can save you

0:00Piercing is the reason that we don't stack entities anymore right used to be like you know you'd stack four five six llc's be hard to find right the the C the internet searching and piercing got rid of it so one LLC between you and your property is more than enough because if I can Pierce one I'm going to get them all and I'm if I get back to the person then I get all of their assets when and when you go from the top none of that limited liability stuff matters right when you go from the owner back down right so if piercing one is piercing all let me give you this really important statistic 80% of piercing on you know a round number 80ish percent of piercing cases come from comingling of funds okay so my advice would be like the you're unlikely to lose a piercing battle just on failure to

0:48Maintain formalities of in the paperwork it's just not enough to get a judge to say right because they know people are sloppy with this stuff the comingled is the bad and and the the common phrase used is using the company as your personal piggy bank now Kirby you and I both know there are no little ceramic pigs anymore left on children's dressers but the idea is this right using the company credit card for personal expenses you know not once or twice but like on the regular you know tuition for the kids or you know what whatever it is vacations things you shouldn't that's Pier that's that's how piercing gets you and because it's it's concrete right this expense is personal not business and they can just stack those and go look and then once they they have that then they go to the documents okay and if everything else is in order maybe you're okay so what I would tell you is

1:36That good paperwork good governance paperwork will protect you from losing a a a comingling battle but it's unlikely that bad governance paperwork would be enough on its own without comingling to to to get a judge to to say yes to peerce because it's a we call it an extraordinary remedy in the law it's a big deal to take someone's limited liability protection from them because it sets a precedent that because this this thing this ability this limited liability the first two L's in LLC you get us in corporations too right this is the foundation of western western capitalism like the ability to take risks with with a fake person's life versus your own that this company is why we take the risks we do none of us and then you you talk about risk all the time there you wouldn't take these risks if you you know I take don't take risk you can't Ure against and

2:25So like you know that's the idea these llc's and corporations allow us to take risks at a very low cost that we wouldn't take otherwise and so piercing is extraordinary and paperwork is a great hedge but the thing that gets you in trouble is the money so if you want an extra layer of protection this it's another thing is to observe these annuals and of course annual meetings for us are very simple you know we do it for clients we'll call you every year we walk you through it right so it's a service to make sure you don't you know we're we are law firms and lawyers are risk reducers that's our primary function right you know we you think we're there to win fights we're not there to win fights we're there to lower your risk so that you can proceed confidently and to your point right those documents which are very simple for us and not simple for people that don't do it every day are a very inexpensive way to protect yourself if you do make a comingling error to say well

3:13The rest of it fine and and it's unlikely that a judge is gonna grab one thing and say that's I'm piercing based on that even if it's a lot of spending so yeah got it okay no that that I really appreciate that and it makes a ton of sense and it you know because there there's some some large firms out there that you see at a lot of these big real estate events that are still selling the stacking model and they try to scare you into you know everyone's getting their corporate veil pierced here's all things you have to buy from us to try to protect you from that and so it's good to to kind of put the statistics to it if somebody has you know I think a a common co-mingling is once you start owning separate properties with separate entities all of a sudden one property is short and you got money sitting over in this other account and it's easy to

4:02Just grab it from that account and bring it over is there a way to retroactively if somebody listening to this has done that go back and fix that yeah absolutely first of all the best time get solution is when you show up the second best time is right now there are no loss causes I you know clients come in and and they're all down in the mouth you know and you can probably tell already I'm not the kind of lawyer to get get in the muck with them I'm like come on man come on stop there's an answer here pick your head up like let's go so yes of course go back we do promisory notes loan one company to the other bing bang bong you did it 15 times okay KY pay is 15 put the date put put in statutory federal minimum interest and move and move the money it's I will say it's easier please make those mistakes inside the same calendar year if you want to make your lawyer very

4:50Happy right what I don't want to hear in January is I made a mistake in October right but I do want to hear in October that I made a mistake in January does that make sense yes it's easier inside the year but we'll still do it right and if you're running a relatively you know like Mom and Pop's close closely held thing you're probably fine to go past to go back a year even two you you start to really at three you start to get a little sketchy with the IRS but like go back and pay for those loans because the date that you say the date effective date you know from when you move the money you're not really back dating this this is what you intended to do write it down get it in writing and then you have it so so you should go back and I understand that in the moment and my clients do this hey Glenn I moved this money no problem Bob I'll get you I'll get the note over there how much how much was it is is three years good two years good yeah and we do it and I send it over via docu sign

5:38And it's done so and it takes you know an an hour so it it's just not it's not worth letting it spin up into greater and greater liability when you can just fix it so yes papering after the fact is fine and of course as you might expect the sooner the the better right but there's always something to do there's always something to do and and and will always reduce your risk so like don't get fatalistic because you think as a non-legal professional that that you're sunk legally that's crazy you know why would you why would you know you know so you know that people get and they never seem quite as confident about their about the good side of the law but they're quite confident that's out to get them and I'm like no no it's just a set of rules it's like math isn't out to get you either maybe you thought so in school but you realize math doesn't care about you right and neither does the

6:26Law so like the idea is redu let let lower our risk together and paper the things after the fact sure I'd like you to paper it ahead of time I'd like all my clients to call me before they sign the contract when and get me to review it but sometimes we do what we can so imperfect Solutions are still Solutions and you should absolutely go back and pay for things once you realize you messed it up because to your point Kirby that that comingling that left pocket right pocket is and so I always say offsets is the opposite of compliance right you say oh well you know I was going to pay this I'll just pay he owes me 10 I owe him five I'm just going to move no no no no no no no no 10 goes this way five goes this way not five this you know no no offsets don't do offsets I know they feel good like oh I'm smart I worked I I have one transaction instead of three listen sure that's smart that's not the right kind of smart right so we're we're we're keeping receipts

7:15That's what it is you're making a record if you want to if if you want to be you know and you're making an alibi well you can call it what you like right but you're setting a record so that you can prove what you need to prove if you ever need to prove it and again all to lower the risk and if you're the kind of person that doesn't think insurance is a good idea if you didn't make a claim like maybe this advice isn't for you but like for Risk Managers like me like this is insurance and it's priced very very smartly for what you get from it so yeah yeah absolutely no that's that's great advice and there's some people walking around like with so much anxiety because they feel like they're going to be you know shaken down at any minute by the either the IRS or somebody who's going to sue them you know so find out yeah yeah it's good to have somebody like you who you can consult with and and ask these questions too so told me talk about it like I love it and the thing is

8:04Like it's almost always better just to just to ask somebody feels good just to get it out I never make anybody feel bad for asking we have a good time you know it's of course it's it's very serious law that we do move Millions hundreds of millions of dollars a year but like it doesn't have to be so D like can we can we can be light ask your question get a real answer interact with it and feel good about what you're doing going forward not everything has to be so Ser this is Ser this work is serious enough without adding seriousness so we can have a real human chat and you can ask your real human questions and get a real human answer and and feel good going forward yeah awesome awesome and and a big question that comes up when we talk about llc's because I think most people in real estate understand llc's are generally the the route to go if you're going to be buying real estate but the big question is like around do I do a series LLC or individual llc's

8:53And I've had I think probably four or five different attorneys on this podcast since it started this is episode I think 259 congratulations 259 thank you my man yeah started 2019 is when I started so it's been a years congrats man it's great thank you thank you but it's interesting because I've had very different advice when it comes to this topic and several topics actually but so what's your take on series versus individual oh so so I'm not a fan of series and the reason is that it's there's a lot of reasons mostly that it's just not a national solution there are states that don't recognize it so you have full p and credit issues it's it's it's

9:41A better idea in theory than it is in practice okay and and and for my practice you have to talk me into letting you do it here I will not just oh here you go they're expensive they're expensive they're big they're you know they're complicated and that's the problem what I what I the most important reason is something I call the series LLC tax and that is the extra time and money that you are going to spend on me or whoever does this for you explaining how your series Works to people that don't know how it works it will be an extra 20% of the money you spend on governance maybe maybe more depending on how sophisticated the people you're working with are and primarily the bankers have the hardest time because they think it's something that it's not that that it is a way to refer to something collectively legally and it's not not the

10:29Only entity that views your series as one thing is the Secretary of State where you file it every everyone else the IRS you know other other businesses you interact with those are all separate entities all of them and there is no there is no Collective action there's no parent there's no Collective it's just these things and case in point when you when you say like I have you know I have you know Kirby's LLC and it's a series that that doesn't mean anything you have to say Kirby's LLC series a to even be referring to a valid entity and trying to get that through a banker's head when they're when they just want to close the deal is not a good time and so they're going to be on the phone comp for an hour and then they got to call their boss and that's another hour and and not I'm not that's not my money that's client's money so so if you have a real need yes

11:18But it has to be a need to over great enough to overcome the cost of it and I they say oh Glenn it's just bad listen 20 years in not I've never had a banker be easy to work with on series and it's an explanation every time and everyone you work with why do I have to put the series name and I thought there was a parent and isn't there no and and and I again it may seems simple but when you start interacting with it you realize it's not so simple and the reason is like the only thing you're really saving is the Secretary of State fees and so how much are those like two or three 400 bucks per what are you saving like annually like so if you if you have 50 sure you you know but you don't you have four so what are we doing and so So to that point if you're not a person that's comfortable spending a lot of time with this and with me maybe we don't do Series

12:08Right may maybe we don't and so that's it right it it it's a useful it's a useful tool at scale and there are there are other there are other areas but it was designed for Real Estate developers not investors right developers people who are taking a subdivision and taking a big plot of land and making you know subdividing it into 300 pieces and that's a of money to pay when you're already at risk as a developer so that's what these were for like there there's also Securities case use that's not what we're here to discuss so in general if you don't have at least 10 properties I won't even talk to you about it I'm just you're wasting both of our time and and if you have 10 and that's probably it that but no but if you have 10 on the way to a 100 like okay but otherwise like no you don't you're not getting enough back it will be more complicated for you and that will last all year long every

12:57Year versus the once a year savings that you get no it's not it's almost not it's almost never worth what it costs and I don't mean the substantial upfront cost I mean that tax and so like the gain isn't the gain isn't big enough there aren't magic llc's they do what llc's do right they they just you can now in in some states like Nevada it's a it's a no notice State you can add a series without telling the Secretary of State that's more risky than it is anything else like okay like what do you really need that for maybe you want that but why do you want that right if you want to be able to expand quickly without having to go through the state or it's a privacy issue like maybe there are privacy reasons to use a series LLC but there those are not the ones I usually see with Real Estate Investors yeah and so you still need a separate set of books for each absolutely series each series is essentially

13:45Its own LLC and it gets its own tax ID which I'm sure that you know right because that's who does find out when you do a new one is the IRS they get their own tax ID they get their own bank account that's what the tax ID is for because a tax ID plus Articles of of organization or incorporation equal bank account right tax ID plus your articles that's bank account those two documents get you a bank account so that's why we do each one has its own bank account so what are you really saving you have this you have this very odd naming rubric that you must follow precisely right and it's going to confuse everybody to save a couple hundred dollars like how much is your time worth like I know how much my time because I sell it right so you know I I just don't for almost everyone it's not a good value prop it's interesting but just because something's interesting to me does not mean I want my clients to do it right that's the wrong you're we're not here to indulge my research interests right like we're here to get you a solution that works and

14:34I would say nine times out of 10 series is not right that way if it is though we're happy to do it and I'd love to find more use cases and nobody gets told no until we hear until we hear you out exactly what you're looking for and exactly what we what we can do to help you but I I do think you know it's about 90% no from this office on series even though it's worth a ton of money to US you can't tell you something you can't use you're never you're never coming back so yeah yeah no no one series well I I think a lot of people want to do the series because they feel like it's going to be less cumbersome they feel like it's going to be lower maintenance and I think the problem that I see with a lot of people is they grow to a point where they've grown into so much complexity that they're overwhelmed and then they can't grow anymore and so right do you do you have any suggestions around it because if you're forming one LLC per property you get to a point where you

15:22Know you got 30 properties you got 30 llc's that's a lot of yeah minutes that's a lot of bank accounts that's a lot you know a lot of yeah I mean like I mean the reality is you should be working with working with professionals that that can do it for you I mean like managing governance at scale is very simple for a firm like hours and very difficult for a property owner the reality is you you figure out a a professional service provider to to help you get like for us like say we have someone has 30 or 50 llc's those llc's are all in a calendar they get an email every month at ones due and it's not an email like Hey we're going to do this for you we've got we've got a an annual plan for filings and so that's what it is right and so it's costing them it's just it's just a line of expense and again whatever that is that's the expense that none of your properties failing catastrophically affects any of the others right that's the idea and

16:11So whatever that whatever that line item is it is and so if if you can manage it yourself that's great but again like lawyers do this very early in their career I think everyone else does it later right figure out how much your hour is worth okay and then go okay it takes me three hours to clean my house I am either a very reasonably priced corporate attorney or the world's most expensive house cleaner like why am I why am I doing so do you want to be the world's best paid governance clerk then don't do your own governance right economists don't mow their own Lawns lawyers don't clean their own houses and and investors shouldn't be doing their own governance like at that it's at 30 at 20 at 10 it should be ours right and if you can't find a firm that'll do it for you like we work in all 50 states like give us a holler and if we don't work for you we'll find someone awesome that does this doesn't need to be something that the people are doing at that 10 20 30 entity stack no

16:59Learn do it do it when you have two or three learn it so you know what to ask for and how to call someone out if they get it wrong and then hand it off it's it's just you should know enough to know how to check somebody and then give it to someone else to do you don't want to be a part-time governance clerk that it doesn't pay you I have them it doesn't pay what your listeners are looking to make you know so it's a younger younger demographic yeah yeah yep no and that's great and and Glenn actually has a white paper on the the basic I understand the basics of llc's right that people should I do the ABCs of llc's yep yep awesome well I will do you have that I'll send it I'll send it over so you can post it up cool yeah I I'll put the link to it in the show notes so you know if you're listening this you can access that there you know and and and it's really place to go to like just go find out it's not written it's written for non- lawyers written for non- lawyer written for business owners okay it's so you can access the

17:48Information and it is in critically important to understand llc's because we win all the time doing the work that everyone thinks is is like you know too not you know too it's beneath them to care about the entities we win all the time because we have because the entities are the rules it's the if in in in this game the The Entity governance are is the rules to the game and so if you don't know them you might win but you probably won't and so knowing what you can and can't do knowing where your Authority ends knowing where the where the L good fences and good neighbors if that right so knowing all that makes you a better business owner every time no exceptions so learning a little bit about llc's will make you'll be surprised how much nonsense you'll suddenly see around you wrongness yeah C come back all right they go I didn't realize how bad it was out there

18:36I'm like yeah yeah it's bad it's and and I I looked at that document again that that I downloaded and I realized how bad it is now and I'm like yeah and there's people out there running legitimate businesses with millions of dollars just all at risk because their document is just they couldn't spend an extra you know little bit on the documents that you know that's that's it's Bridge Too Far they'll just take they'll roll the dice that is you know it's when you know what these risks are and how easy it is to to to reduce them to the point where they're manageable it's it's it's it's like bungee jumping without a cord just because like yeah it's exciting but like you know until you hit the ground so yeah yeah yeah yeah absolutely yeah I think it's kind of like the knowing the fundamentals in sports you know you got to learn that before you get too fancy so yeah making a great making a multi multiunit deal is all well and good but we're

19:24You know how are you going to hold it is a question you should have asked but you know like not not at closing right and so I think that just helping people you know and again if you don't want to care about this stuff like let us care about it for you like that's the idea is like we'll educate you so not so that you can do it yourself but so that you don't have to so you can trust what we're doing because you there's points to verify I know this I know this I know that you can spot check like your like your clients do they're not doing all the things to spot check right inspect so they can check and then feel comfortable that the job is being done without abdicating right they're just delegating it to us not abdicating to us so I don't want I don't let clients Advocate to me even if they want to no matter how much money they have you have to know what's happening otherwise you know that's the wrong job so like you want to understand enough to know how to check your lawyer but you know probably not enough to do it yourself because

20:13If if you're gonna get a JD they come work come workor here but if you're going to invest in real estate like don't don't get a JD if you don't already have one oh