We live in a very litigious society, which is great for lawyers, but bad for business owners. When attorneys operate on contingency fees, they get a percentage of what they’re able to collect. In a circumstance like a car accident, this can be helpful, but a frivolous lawsuit filed against a business owner could potentially bankrupt them.
Garrett Sutton is an attorney, but he’s the good kind of attorney. He’s built his business Corporate Direct around the idea of helping business owners protect themselves. I’ve personally used Corporate Direct for years to create new entities for my own companies, but Garrett also helps other entrepreneurs, whether it’s in the e-commerce space or real estate investing. Garrett was also one of my first mentors, and I got my start in real estate reading a number of his books.
Garrett’s newest book is called Scam Proof Your Business and it addresses the question: What is asset protection and why is it important in the digital economy? For newer investors who might’ve just closed their first deal, or who are preparing to make an offer, I know you want to know if an LLC or an S Corp is better for your business. If this sounds like you, Garrett’s going to lay down why you need an LLC, why you should consider incorporating outside your own state, and how to protect your company from cyber fraud.
Do You Need an LLC?
Everyone’s situation is going to be different, but there is no getting around the fact that the first investment property you buy should be inside an LLC. Investors might start out with good intentions and fully intend to set up an LLC and have it taxed as an S Corp, but they don’t have the money right off the bat. So they put it off. Then they get so busy in the crush of business that they never get around to starting an LLC.
Setting up an LLC after you’ve purchased a property in your personal name is like putting a seatbelt on after a car crash. When someone sues you before you can remember to get that property set up inside an LLC, you’ve put all of your personal assets at risk too. The equity in your home, your investment property, and even your savings account can all be seized when your business assets aren’t contained inside a legally tight entity.
And remember the litigiousness of attorneys operating on contingency fees? In Garrett’s practice he’s seen it happen before, so he wants you to start off on the right foot. You absolutely need an LLC to put your first title in to protect your personal assets from the beginning of your investment journey. However, there are some states where the asset protections are so much better than it’s worth it to incorporate outside your own state.
Best States for an LLC
As a result of the American Revolution (yes, really), Americans developed a great hatred for national corporate law. They were fighting against British East India Company, a mega-corporation that bought up politicians and rulers and controlled political policy in the 18th century. As a result, the American government refused to create national corporate laws, and instead pushed that kind of lawmaking onto states. This is great news for businesses since states have to compete to be the best place to set up a business.
According to Garrett, his favorite states for setting up an LLC are Nevada, Wyoming and Delaware. All three states offer the strongest possible protection against a charging order. A charging order is a court-ordered lien placed on distributions from a business. Garrett explains it like this: If you’re in an at-fault accident, you can be sued for your assets. But if your assets are in an LLC, the only way that the lawyer can get at your money is through a charging order. If you never make a distribution outside your LLC, and you don’t have to, then there’s no way for the lawyer to be awarded your assets.
If you’ve already incorporated your LLC and it’s not in one of these three states, there’s still a chance to fix that. For whatever reason, a few of my properties are incorporated in Ohio. Even though my assets are protected, they don’t have the strongest protection available. In an instance like that, Garrett can just set up an LLC in Wyoming as a passive holder of my properties in Ohio.
Cyber Fraud Protection
Besides legal protections, Garrett is also concerned about the amount of fraud floating around on the internet. It just feels like we’re constantly inundated with spam emails, robo-calls, and phishing attacks. It can be hard to keep track of what’s a legit offer coming through your email inbox, and the fraudsters know that. They’re feeding on your greed and fear.
One of the biggest frauds occurring right now is wire fraud. You’ve probably seen it on the news: someone goes to wire their down payment to the title company and they click on a link in an email and send their money to an ACH number that’s just a few digits off. And just like that, their $50,000 is gone. Maybe they’ll recover it, but probably not. Because even though the federal government is aware of cyber scams, there are just so many that they can’t keep up.
You can take a few extra steps to protect yourself. You can purchase cyber liability insurance from your insurance broker. And you can keep your Spidey sense up and pay attention to common real estate scams. Garrett’s newest book Scam Proof Your Assets can also help you understand the patterns or common scams that are run on business owners and consumers.
Putting legal protections into place will not only help you sleep better at night, but will also do more to guarantee the long-term success of your investing business. If you’re looking for a mentor like Garrett was for me, I’d love to talk with you. Apply for coaching at JoshCantwellCoaching.com.
Listen to the full interview here.