Scott Smith is an Asset Protection attorney and real estate investor with experience in everything to flipping houses to buying notes. Scott specializes on how to make sure you never lose money from lawsuits.
Scott wanted to focus his business on giving people the top level of protection possible, without complicating anything or increasing taxes. “Is it possible to have the best of all worlds?” He asked himself. Turns out it is. And that’s how his business was formed. The types of protections offered, and the way people can scale infinitely with their help makes Scott’s law firm the most competitive in the country.
Scott has been a real estate investor for 8 years, which is why he exclusively works with real estate investors. Now you don’t have to hunt down a lawyer who might know some things about real estate investing. Because Scott’s law firm is so specialized, not only can he help with any of your real estate investing needs, but his team can help anyone in all 50 states. Don’t worry, we’ll have contact information further down in the show notes.
One of the biggest ways to lose money as a real estate investor is holding property in your personal name. Scott explains it like this:
“If you’re holding property in your personal name, what you’re really saying is that if anything goes wrong anywhere in your life, you’re ok with someone being able to attack anything and everything that you own.”
What Scott focuses on in his law firm is separating the assets from the operations. You should have 2 companies. One that holds your assets, cash, stocks, personal investments, etc. Then the second one is what Scott calls your “Operating Company”. That company handles the actual “business”. It’s the company that manages the hiring of new employees, dealing with contracts, handling your leases, etc.
“Lawsuits work because there has to be a connection,” Scott tells us, “between the thing people are complaining about, and the business people are complaining about.”
So if all of your operations are going through one company and someone has a problem with it, they can only sue that company. They wouldn’t be able to attack your assets because their relationship is only with the operating company you have. It’s a way to protect what you’ve worked so hard to get.
Let’s say you’re flipping in your personal name and you’re hiring all of the contractors yourself, basically acting as the GC. That means that if anyone has a complaint against you, or the property, or anything that extends to insurance liability, that whole property gets locked up if they decide to sue you. Once that property is locked like that, you won’t be able to do anything to it until the law suite is settled.
The way to get around that is by setting up your asset company as an LLC. the best place to set it up is in Texas, but there are about 10 other states that make it easy to set up. You can use that company anywhere in the US, just like any other LLC. This is your asset company. Then, from there, you would set up a local LLC for your operations company. This one has to be local because it’s where you’re doing your day to day operations of your real estate investing business.
So let’s say you get a contractor and he makes some terrible cabinets for you and you tell him that they’re not good and you’re not going to pay for them. Of course he’s going to be upset, so he decides to sue you. Well, since you hired him through your local shell LLC, he’s not able to attack your personal name or your asset holding company. That means that while the lawsuit is going on, you can still work on that property and get it sold, and all of your assets are safe in the process. Again, this is a great way to protect yourself, your assets, and your business.
In your worst case scenario, you wind the LLC down that got sued and then open up another one to act as your operations company. In the end, you might be out court fees and a settlement, but your properties are all protected. Plus, you were still able to conduct business while the court case was happening, meaning you still made money. This is a really efficient way of getting rid of issues like that.
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Danny Johnson: This is Flipping Junkie podcast episode 102. [music] Welcome to the Flipping Junkie podcast. The podcast for flip pilots everywhere. Flip pilots are the house flippers that work more on our business instead of in our business by keeping a 30,000-flip view. You’re now part of a small group of house flippers that considers themselves flip pilots that strive to build the life of financial freedom and time freedom so that we can spend more time doing what we love with who we love. In this podcast, I give you a glimpse of the daily life of a flip pilot so let’s gets started.
Hey, everybody. Welcome back to the Flipping Junkie podcast. I’m super excited today to have a talk with Scott Smith about asset protection. I don’t know if this is something that we’ve talked about on the podcast before, so I’m super excited to dig in with him and find out what we can do to avoid problems that could happen down the road. None of us would want to have that happen. But if there is a lawsuit or something, we best set ourselves up beforehand so that we’re not going to sink the ship. So this is going to be a great show. He’s also providing some awesome stuff for you guys, some great information to download, and you can get that from the show notes page at flippingjunkie.com/102. Head over there to get that great info about asset protection for real estate investors. It’s going to be great show. Let’s dig in.
Danny Johnson: Hey, Scott. Thanks for joining us.
Scott Smith: Hey, Danny. Great to be here. Thanks for having me.
Danny Johnson: Awesome. So everybody, on the Flipping Junkie podcast today, I’ve got Scott Royal Smith who founded and owns Royal Legal Solutions in Austin, Texas. So he just ride up the road for me. Welcome to the show.
Scott Smith: Great to be here, Danny. I understand you guys do a lot of house flipping, so I’m excited to tell you guys today about how you can do your flipping and make sure you never have any skeleton in the closet that come back to bite you. Flipping is inherently the most risky type of investment you can do with real estate. I think I have some good stuff for you guys today.
Danny Johnson: Awesome. I remember early on whenever I was first getting started. That was always one of those concerns for me, and I have those nightmares where I’d wake up in the middle of the night wondering if the part of the roof that got rebuilt 10 years from now would collapse on somebody. All that kind of stuff that—I was younger too, but those are just kind of things that I would worry about. I know you’re talking about asset protection, and we’re going to cover some of these maybe stories. Hopefully, we’ve got some stories from people that have experienced something to help other people out there to not make the same mistakes that maybe you’ve seen made or ways to just prevent certain mistakes that you’ve heard of.
Scott Smith: I got some great stories for you guys, and there’s really just a couple of basic things that you have to do to just eliminate 99% of all the risks. So I can’t wait to dive in to all of that here as we get going.
Danny Johnson: Let’s start with your story, Scott. Why did you start your business? What led you to do that?
Scott Smith: Well, I owned my first piece of commercial property actually when I was in law school. It was a transmission auto repair shop, so we bought the building and the business. And I did all the business operation side. My buddy, he was also a law student. He ran the mechanic side of everything. That was my first property.
Then, I graduated from law school and became a litigation attorney until I realized that everybody in the world who is a litigation attorney absolutely hate their life. And I was like, “Hell with this. I’m getting out.” Then, I jumped out and just started hitting up [___ 00:03:55] because I always like real estate and I really like Rich Dad Poor Dad. That kind of got me on to that track of thinking about it when I was really young and then found some people there that said, “Hey, you know, I have this issue that I got. My dad has 55 houses, and I don’t know really exactly what to do with that. Do you think you can help me?” “Absolutely, I can.”
And then after about two months later, I finally actually knew how to help him. That was some pretty hard study, and that was the start of the company. The whole bent of it was saying how do we have the top level of protection possible without complicating our lives, without increasing taxes, and have streamlined operations. Is it possible to have the best of all worlds? And that was the launch of the company, with the essential pieces that we put together for people which actually does from what I can tell makes us the most competitive law firm in the country in terms of the types of protections we offer, how people can scale infinitely at no cost, how they can hide assets, and how it doesn’t cost an arm and leg to do it.
Danny Johnson: Nice. So you guys are focused mainly on real estate investors as clients?
Scott Smith: A hundred percent. A hundred percent of my clients are real estate investors. I’ve been investing in real estate for about eight years. I typically will only work with real estate investors. It’s just the world I live and breathe, right? I don’t handle anything else.
Danny Johnson: Nice. So if you guys have questions out there, we’ll share later how to get in touch with Scott. And if you’ve got questions, I’m sure he’s knowledgeable and can help you and save you a lot of hassle from. That’s kind of the problem, when you’re trying to figure out first who to talk to because sometimes you can get different answers from different people. And with legal issues, it’s always best to find somebody that specializes and knows the business.
Scott Smith: And that’s especially true, Danny. And when you think about what we’re talking about with company structures and taxation, it goes. And so, we help clients in all 50 states because we’re so specialized that we’re able to do that for real estate investors. And the issue here that you’ll find out is that when you hear two different opinions online from two really smart people, both people are actually right even though their answers conflict, but they’re right answering different assumptions to the question, right?
So what it really takes and what we say to people is, “Hey, listen. You can spend a ton of time getting up to speed on all these different issues that are going on for you to like kind of guess if you’re right or like you can come with us and we’ll sign you up for a risk-free consultation that ends up taking you. And then, we provide not only what you need to do but also answer why is this ideal for your particular situation and not maybe potentially and maybe not for somebody else, right? And I would say like that.
So #1 rule that I look when I try to hire professionals—because I hire a bunch of CPAs and attorneys for myself for my invest—is that I look for somebody that has to be in the same business I’m in; otherwise, it’s a no go. I’m not going to hire somebody who’s like that because they won’t really know the ins and outs of what I’m trying to achieve.
And the second piece is that they have to be able to explain to me why they’re doing what they’re doing. I don’t trust anybody especially when it comes to information because there’s really nobody that that’s smart that they can explain to you what’s going on. If they can’t do it, explain it to you that this is better than the alternative, then really it’s the case that they’re just not very good at what they’re doing as they don’t really associate it to be able to dumb it down to whatever your level is. I can explain this stuff to a five year old if I really needed to. If you can’t do that, then you don’t understand it.
Danny Johnson: I’d love to see that because I always love when people are able to do that. And you’re right. It does show that they really know everything inside and out, have a good way of explaining, because that is a problem, I think. Whenever I’ve gone to learn some things and get some help with legal things, it’s hard even to understand what’s being told to you to make a good decision on whenever you believe that that’s true or that’s the way you want to go and to be able to come up with questions that you might not be thinking about that are affected by whatever decisions you’re making.
So I guess I want to structure this podcast episode to be very useful for the different people in the audience, so if we could maybe do it in a way where I’m asking you as a house flipper. So most of what I do is house flipping and I come to you and say, “Hey, how can you help me? What are the things I can do to make sure that I’m protecting myself as much as possible? What are the different risks that I have and all that kind of good stuff?”
Scott Smith: Yeah, Danny. Well, I’ll tell you that it’s the same strategy we’re going to be using for house flipping in terms of company structure for protection. It’s the exact same strategy we’re using for buy and hold investors. So what we can do is talk to—I can kind of point out like: You’re flipping. You’re probably worried about this and this, and this is the way it’ll shake out with this type of company structure. And if you’re buying and holding, you might be more concerned about this and this, but this is the way it works out for company structure. So why don’t we just take it from the flipping? What are your toughest questions? What are the things that you hear the most that you think people have a lot of different points of view on or contentious types of issues? And then, I can talk you through what it is that we set up and why. Does that sound good?
Danny Johnson: Well, you probably get a lot more questions about legal things than I do.
Scott Smith: Yeah, probably.
Danny Johnson: If you want to just go by with maybe the most common ones that you’re receiving and maybe talk through sort of your approaches to handling those.
Scott Smith: Yeah. Well, usually when I talk to people about that, usually what I focus on is like what are the great ways that we lose money as investors. Of course, there’s really good ways to lose money like jumping into deals before you really have vetted them and before you know what you’re doing. Trying to jump into a deal solo when you should be joint venturing with somebody who’s more experienced, that’s a great way to lose money. And one of the other great ways to lose money as an investor is to hold property in your personal name or you’re flipping houses in your personal name. Because when you’re holding properties or flipping houses in your personal name, what you’re really saying is that if anything goes wrong anywhere in my life, I’m really OK with somebody being able to attack everything that I own.
That’s a nonstarter for me as an investor and as a business person because what I want is for things to go really wrong and for me to be really OK, and that’s what we set up for people saying, “How do we set that up?” And the key phrase here, Danny, what we focus on in our company with Royal Legal Solutions is we always separate the asset from the operation. Those are the two main wings of your business. You’re always going to have an asset holding company. That’s going to be the thing that’s going to hold all of your cash, going to hold your stocks, your personal investment. It’s going to hold all of your properties, etc.
And then, you’re going to have a totally separate company that we called operating company. That company handles all of the actual “business.” It involves all of the contracts. It’s going to be involved with hiring the people that’s going to be working. It’s going to be handling your leases. It’s going to be doing anything where you would be facing the world and doing business to the world because lawsuits work because there has to be a connection between the thing that somebody is complaining about and the individual that’s complaining about. That’s the nature to a five year old of what’s going on with a lawsuit.
If all of your operations are going through this one shell company that we set up, that’s who they had their relationship and that’s who made all the representations, that’s the only person they get to sue. They don’t get to sue the asset holding company. And then some people say, “Oh, well, can’t you just sue anybody?” And they’re going to sue everybody. Yeah, you can but the way lawsuits work is that typically as a plaintiff you sue everybody and then a ton of people get dismissed from the lawsuit because you actually have to have what’s called a bonafide claim against the individual.
So it’s not that something can’t be named in a suit. It’s that it survived after the first two weeks of the lawsuit. And that’s what the operating company does, is that it cuts off the liability to you and to your asset holding company and to all the other parties.
Danny Johnson: So how does that work for the investor with the company that’s doing operations and then the asset company? Let’s say I’m flipping. So how does that look with operations and then with assets?
Scott Smith: Sure. So one thing would happen. Let’s say you’re flipping your personal name and you’re hiring. You own the asset. You bought the house in your personal name and you’re hiring all the contractors yourself. You’re acting as the GC. So what that would mean is that if anybody had a complaint, if the contactor had a complaint or really anybody had a complaint against you connected to that property or an unrelated business or a car accident that exceeded the limits of liability in your insurance policy, that locks up an entire property. It’s what called a “lis pendens” on that property, and it locks with all these litigation. So that’s totally not good. You don’t want that.
So what you would do is you would set up an asset holding company. Typically what we’ll use is the series LLC structure. Cheapest and best place to set it up is through Texas, but you could also set it up in over 10 different states and you can use that company anywhere inside of the United States just like any other LLC. And then, you would have a completely separate LLC that’s there, local to you that would be hiring the contractors, etc.
So I would say like the contractor builds up some cabinets and you’re like, “You’ve never really crafted cabinets, dude. I’m not paying you for them, and there’s just no way.” He complains and he says, “You’re trying to steal from me,” or whatever. The person who contracts them is the shell LLC. So when he would go to court to sue, he would try to sue this shell LLC. Well, what did you just do? He can’t sue you, so you’re still good. Your credit score and everything is still protected, and he can’t sue the asset holding company which actually owns the property then you can still keep running your business even though there’s other litigation that “involves” what you’re doing, but it doesn’t actually prevent you from running your business and making money.
In your worst case scenario, likely this lawsuit is not going anywhere. Let’s say that he did and he pushed all the way through and spent the $20,000 to push through all the way through litigation against this shell LLC. Your worst case scenario is that you wind that LLC down meaning you close it and you just open up a new LLC. So for like $1000, you just take care of that whole problem. There’s really a sufficient way of getting rid of nuisance.
Danny Johnson: So obviously, we’re speaking about—the first thing is just running your business properly. That’s the best way asset protection, is to not be doing things in a way that’s going to get you in trouble first and foremost. Asset protection, being something to protect yourself against some things that happen or people that are just out to try to make money from your through litigation. So anyway, I think that’s important to be said. I think most people listening probably agree with that.
Scott Smith: Let me catch up in there, Danny, because what you just said is actually really common or I hear a lot. It’s not actually the full case because most lawsuits actually happen because of misunderstandings. Oddly enough, that’s actually real most litigation happens. It’s really uncommon that people are actually really shady with each other and what they’re doing. So especially in a real estate investment community because it’s not like sharky business people that are doing all this, right? Most of the time, it’s because people are misunderstanding because something was sloppy. So like, just to elucidate the point, I’ll tell you one thing that happened with a client of mine, is she ended up having a flip property that she bought and they replaced a bunch of the plumbing that was in the house underneath the floor. Then, there was a question about the plumbing. So the buyer ended up emailing her to ask her, “Hey, what plumbing underneath the house has been replaced?” Their response email was: All of the plumbing has been replaced. There has been a leak in one of the plumbing that was in the wall. And then, they have caused $75,000 worth of damage and then the lawsuit started.
Well, what was the lawsuit based on? It was based upon those emails. One email asked what plumbing underneath the house has been replaced. The other email said sloppily, “All of the plumbing has been replaced.” So the buyer took that to mean all of the plumbing in the house and its entirety had been replaced and therefore we had a bonafide lawsuit that could’ve gone all the way to a trial. So that’s where the misunderstanding comes up, but it’s also major lawsuit. We got that dropped because she had the right company structure in place, but that’s what I mean. There’s no intentional fraud there, right?
Danny Johnson: Right. I agree with you, and I think there’s a huge lesson there to be learned. There’s a couple of lessons actually. The one just being careful about what you’re telling people making sure you’re very clear about it. And then second one is the email, text, and voice mail kind of things where you’re doing this and giving people something to look back on. So you told me this when a call or something typically is not going to get recorded and so you have less of those disputes.
But anyway, my only experience with having somebody do something was a shady person. Melissa was at a home. This was early on in our investing. A sheriff came to the front door. She was thinking something happened to me like a crash or something and they were serving us. The neighbor of one of the properties we had flipped was suing us. This guy was a complete jerk, and what he was trying to say that we had cut his tree branch on the tree in the front yard a feet over the property line on one branch. He was trying to get something for what was like 3000 bucks out of it or whatever, and it was just a complete bull crap kind of thing. He didn’t even own the property when we cut the tree branch and he bought it as is, so there wasn’t any issue. It was just dropped. His wife was an attorney or something and so he didn’t even—she was the one that filed the suit and all that kind of stuff, but it was just complete garbage. Somebody saw. We made some money and then wanted to get a piece of that real quick.’
Scott Smith: I feel you, man. That kind of stuff unfortunately happens too in the United States. But one thing we have to realize and kind of take into account whenever we’re being real estate investors is that we live in the United States which is the most litigious country in the world. It has the most lawsuits than any country in the world. Then, we decided to be real estate investors which among that is the most litigated industry. Our research indicates that we have over 95% probability of being sued as a real estate investor during your life.
The questions that we ask people is: If you’re going to get sued at some time—because you can’t control that. It’s when you’re going to get sued and what position are you going to be in whenever it happens and that really is like the knots and bolts at the end of the day of what you’re going to be looking at, right? Stuff like that happens exactly like it happened to you. I see the stories all the time. Lawsuits of all different types of levels, right? At $3000, that’s a lot of money, right? But I’ve seen guys lose millions because they said, “Oh, I have an insurance policy so I’m fine.” And then, this other lawsuit end up creeping up and wiping up huge amounts of their wealth. So if you want to somebody age, that’s a really good way. In two years, you age like 10 years.
Danny Johnson: Yeah, I can imagine. Who does the hassle of dealing with it?
Scott Smith: Everything shuts down. Your whole business and your life shut down once you’re involved in a major lawsuit.
Danny Johnson: So I have a question, too. If you have like the asset LLC or whatever then and you have the operations one, my question was—and this is probably more of a CPA-type question—doing the payments like doing payouts and stuff like that, are you doing payment checks? You got a loan to buy the house and it’s for the LLC that holds the property and then you hire this contractor from this operations company. Is that asset company writing checks to the contractor? Probably not because you don’t the direct—the payment or the agreement for the contractor is through the operations company. Do you know how that typically works?
Scott Smith: Yeah. When you’re talking about like what company is going to hold, the company itself are all born naked, right? They don’t own anything. The only reason they have anything in the world is because we contribute stuff to them. So what happens is that you acquire the property however you’re going to acquire the property. That either could be like through directly in the LLC and you’ll do some type of commercial financing with that or would you end up doing acquiring a property in your personal name and then transferring it over into your asset holding company. And then there becomes a question of saying: Now that I have the asset in there, how am I actually going to be having the money flow around? And all of the money is going to be flowing through your operating company, right? All of the money is going to belong to the asset holding company, but it’s going to flow through the operating company because that’s the one that’s contacting with everybody and you don’t want any paper trail that connects to your asset holding companies or any third parties ideally.
So what you’ll do is you just hold all your—you have a property, an agreement, a contract between these two entities that says, “We’re going to be a property manager and contractor and work for you on that behalf until you’ll be holding cash for us.” But just like how you would normally with a property management company, how they hold a bunch of cash but none of it belongs to them. If they’re sued, all of the money still goes back to the investors. If somebody sued the property managing company, they don’t get to keep all the money that belongs to all these other people. That’s the legal principle that we’re working on. And so then what you would do as this LLC is just keep track, what are the expenditures and what not that it’s paying out to everybody. And then after the deal closes or sells or whatever, then all of the cash is distributed out of your operating LLC.
Danny Johnson: The asset company is now on deed on record as being the owner of the property and something happens. So something happens and they say, “Well, who’s the owner of this property?” Even though LLC is the one that contracted the work or did that kind of thing, how does that work with the actual asset company being the owner of the property, does that cause any problems? Or is there any way to sort of shield that?
Scott Smith: Yeah. So we can actually hide the ultimate ownership of the company and the asset from anybody being able to find out that it belongs to you or to the company. We do that typically by using land trusts. And because land trusts are private documents, then we can hide who actually owns everything. When people get stopped, the only thing they’d be able to find is that a different trusts or owners of the piece of property. So that’s a really neat piece of it especially if they’re buy and hold investors. We use a series of LLC in combination with anonymous land trusts because that allows to infinitely compartmentalize for free every single asset and hide all of the ownership which is the maximum type of protection you can get.
However, let’s say you had a lawsuit against the first property, property A, and it’s held by your LLC or your LLC land trust combo, what will happen is somebody would sue the trust itself. Say a grandma fell through the stairs and the insurance company denied coverage because their stairs were rotten. They say, “Actually, that’s gross negligence. We’re not going to cover that.” Or if you didn’t have insurance at all, what they would do is they would turn on and sue the trust as the property holder and they would be able to attack the property of that trust. They would be able to attack that one individual piece of property.
But this is why we use a series LLC structure because it’s more than likely you have more than one property, right? Then, you would have a series B, a series B, a series C, and series B. I don’t think I said that right, but anyway. If a lawsuit results again to one, it doesn’t affect any of the other one. But the great part of asset is, well, I still have one property that’s exposed if something happens in connection to that property but it also means that they can’t come after me and they can’t come after the rest of the properties so it’s a manageable loss instead of a catastrophic loss.
Danny Johnson: Awesome. So I have a question though about—have there been any cases where they’ve been able to basically go through and demand that they find out who the beneficiary of the trust is and then find out what else they own and bring those into the lawsuit? Have you heard of that ever happening?
Scott Smith: So what will happen is they sue the trust itself and then there’s a process called discovery wherein they’re able to obtain the trust document. And then once they’re able to obtain the trust documents, what they find out is that the trust is actually owned by the LLC and then the LLC is in turned owned by its trust. So there’s always layers of protection that come through. So it’s really difficult for anybody to find out the ultimate information; however, it’s possible through the discovery process to be able to keep or questioning core documents as it is relevant to the case.
In this particular instance though, you would likely be stopped by the court from being able to find out the ultimate owner of the property because the court would say, “This isn’t relevant to the ultimate owner. We’re only talking about this individual trust and LLC,” and that’s where the liability shield would stop. However, you would also need to consider that you actually end up having to appear in court a lot of times depending on how it’s going to go. Rightfully, there’s some practicality to this about people being able to find something out, but that’s really not the type of anonymity wherein anonymity comes important. It’s not nobody could find out anything no matter what, they would sue you and spend $200,000 to your lawsuit. What we’re really trying to do is mask all the ownership so that way it doesn’t look like you own anything, and it doesn’t look like there’s a good target to sue, right? If you own everything in your personal name, you’re just carrying yourself as a target and that’s what we’re fighting with. It’s saying how do we make sure that none of your assets are a target, that your company isn’t a target, and that you’re not a target.
Danny Johnson: That’s kind of where that question came from. I was saying like something happened and the attorneys are saying, “Hey. Well, I know this guy. He does a lot of real estate investing, right? And this property…” I guess I don’t know if they know exactly that it was you. But whatever asset they determined, maybe they even did where they found out that the trust own it and then what’s the beneficiary of the trust and that company is separate by itself or didn’t have any other assets. And them saying, “Well, you know, let’s find out what else the people that own company own.” Does it ever happen that way? Are they trying to find where there’s more assets because there’s not enough in what they found?
Scott Smith: Yeah, they’ll phish for it but that’s part of the litigation fight. It’s saying you’re not purview to that information. That has nothing to do with the lawsuit. Lawsuits are to be based upon like one of the merits they claim against that. In this case, let’s say the grandma fell into the stairs example, that’s the gross negligence of the owner of that piece of property. And so, we’re suing the owner of that piece of property. And the asset that’s exposed is that particular asset because our LLC is what creates that compartmentalization. That’s where the liability would stop. It’s at the LLC level, right? So they don’t have a claim to be able to say that we get to just infinitely ask for discovery above that because that has nothing to do with the claim of grandma falling to the stairs, right? So that’s where it cuts off, that piece of it. It’s no longer relevant and all the others as well above that.
Danny Johnson: And then I’ve heard before and this is just secondhand information, investors talking. I remember who told me, but there was talk of somebody, a trustee of the land trust, being named in the suit. This gets back to your question where they just sue everybody and people end up being thrown off of it. But the trustee being named in the suit—so the company had a trustee who was actually in another company and they had one of their employees sign for that as the trustee for the land trust and then they got sued, and they brought that person into the lawsuit. Have you heard of that happening? And is that typically something that kind of goes away because it wasn’t really that person that really had anything? They were just the trustee.
Scott Smith: Yeah. So likely they’ll only going to be able to find liability trustee as the trustee committed some act of fraud. So it’s very likely the case that the trust is going to be dismissed from the lawsuit. There’s probably not a bonafide claim against the trustee itself where also it’s part of the services that we offer since we’re an all-inclusive law firm, so we also offer all of the trustee services like through us, right? So if you’re worried about that kind of piece of it, we take over all of that function because it increase the anonymity and it says if you’re sued, we’re going to take on that liability. And there’s also a piece of it too, is that we also are highly protective of the structure. So if there’s ever a lawsuit that come up, what I always tell my clients is we’re going to be the first person behind you to be able to defend it if this thing is ever challenged because it’s a quarter million dollar product for us courier and we sell at a minimum,. So there’s a ton of money that’s our incentive to make sure that this stuff doesn’t get attacked in a way that’s going to be successful.
Danny Johnson: Smart. So can you explain the series LLC for those that don’t maybe haven’t heard of that before and what exactly that involves?
Scott Smith: Yeah. So if you think about the series LLC, there’s one LLC that gets filed with the state and then there’s 10 plus states where you can file that. You can file it in one state and use it anywhere just like you would a normal LLC. There’s a difference between a series LLC and a traditional LLC. A series LLC is allowed to create what’s called child series. If we think about a parent-child relationship, the parent LLC gets filed with the state. It can create many child series at once and they’re all for free. So literally, you’re able to create as many legal entities that act just like LLCs for free on your desktop and they don’t have to be filed or anything. You’re just able to print up the document and sign it and now you have a new company under the law where you can operate and do any transaction through.
So I’ve seen guys from flippers that’ll have houses underneath them. I’ve seen guys that will just have a template document. And for each new deal they want to get into, they’ll create a new series. Imagine how cool that is that you can go ahead and almost like breach any contract you want to with immunity because you’d create a series that enters into a deal. You say, “I don’t really like that deal.” They say, “Hey, I’m going to sue you.” You say, “Great.” What did they just sue? Well, it’s an empty series just like an empty LLC. There’s nothing there for them to take, so they can’t really get after anything.
So there’s ways that you can use these legal tools to leverage your ability to do business and make more money and be—in a way, you don’t have to be like as careful with everything because the process that you’re using takes care of anything that would go wrong. So you’re able to just operate a little easier.
Danny Johnson: So are there any problems with having LLCs that do very little where you have to maybe show meeting minutes and different things to show that it’s actually a true—?
Scott Smith: It depends where you form, right? So if you form in California, your LLC does about nothing to protect you. If you form it up through Delaware, Nevada, Texas, or Wyoming, these states require—particularly I like Texas because Texas doesn’t have any yearly ongoing requirements for the LLCs. It’s free. After the filing, there’s no yearly fees associated with it like other state. And so, it’s really low maintenance and really high protection. Where you form actually it matters a lot.
Danny Johnson: Texas is awesome on so many levels.
Scott Smith: Yeah, for sure.
Danny Johnson: All right. So let’s move on sort of like with the series LLC and some investors having a form on their desktop and just creating the LLCs. It’s sort of like what people do with land trust as well because you can just take document and create it and have land trust.
Scott Smith: Yeah. Land trusts don’t actually provide any protection. They only provide anonymity. So if you sue a land trust, you’re still getting back at whoever created the land trust. That’s why you have to marry the land trust with an LLC. That’s the only way you get anonymity and the protection.
Danny Johnson: Nice. That’s good point. All right. So what other nuggets do you have? What other great tips for flippers or holders? If you’ve got one that you want to share right now or I’ve got another question. I can wait on the question.
Scott Smith: Yeah. The only piece that I would say is that if you’re a buy and hold investor, is that when you want to look at this, it’s about when does it start making sense to be able to have asset protection put in place for you. And what I really look at this as I say the way we set it up at least is that there is a one-time expenditure that you end up making to be able to protect everything for the rest of your life. And so if we’re ever making investments that are like that, that are good for the rest of our lives, they almost are always at a really small yearly cost. We’re going to live for a while at least. So take that into account. It’s usually what I say. It’s usually around $50,000. If you have more than $50,000 in equity, cash, or stock whatever, you start to have enough money where you’re going to do work as an individual and having a property. The problem with real estate, unlike your other personal assets, is that with real estate I can actually look in public records to find out how much money I can get from you and I can then know it. And so then it makes you a really attractive target for anybody to come after you.
So with the modern way of how properties are escalating in prices with equity, you would also expect some other things to happen too which is if the real estate market turns or if the US economy turns, every time you have a turn in the economy and a downstream in the economy, litigation actually increases because there’s less money that people are making. So what they try to do is take it from other people their litigation. And when you find that going on, you would also realize the benefit of saying that it’s good that I protected myself ahead of time because after a lawsuit is actually filed against you or even threatened against you it’s already too late. These measures only work as proactive steps. They don’t work in reverse.
Danny Johnson: Smart. So there’s a question about when you’re doing the LLCs. And I guess if you’re doing a series LLC or you’re doing something like that—this question probably doesn’t make sense—but sometimes there’s a question of how many properties should I put in and this probably has a lot of variables too like how much they’re worth and all that kind of stuff. But you recommend sort of one LLC per property or putting in X amount of properties into LLC if you’re holding?
Scott Smith: Yeah. So I think holding one property per LLC is the old way and the expensive way of doing this. The better way and new way of doing it is using a series LLC structure because it’s more efficient. It costs less. It has less overhead in terms of like what your management needs to be. Your tax preparation is easier. Everything is better in using a series LLC versus individual LLC. There’s no reason to do that except for the fact if you only have one property then maybe just do a single LLC, right? And then that’s all you ever plan on having.
But if you think about this like even five or 10 years down the line, it’s really probably uncommon that anybody is saying like, “Oh, I’m never going to have more than one property.” Most of us are investors, so we’re thinking, “I want to keep acquiring more.” And if that’s the case, then you want a company structure that’s going to scale with you, that’s going to be efficient to scale with you. And an LLC isn’t that case because if you have more than one property in an LLC, a lawsuit against any of those properties then exposes all of the asset for the LLC, right? So that’s a nonstarter. And anything else you put in the LLC, right?
What I’m suggesting is that we create a series LLC with each individual real estate asset held in an individual child series and we move all of our stocks, extra cash, everything into the parent LLC or into another individual child series. Either way would work. That way, if somebody could sue us, we’re judgment proof. We don’t own anything for them to get after. They could sue. Anyone of our individual properties that can have liability. Only that property is going to be exposed. Anybody could sue our operating company. We just simply wind down an operating company and start up a new one to protect you from all sides on this.
The costs are negligible in terms of the risk of being wrong and what you think the risk is because these types of risk with litigation, you’re not able to anticipate them. There’s no good metric of like “I’m an honest person” or “I prayed five times a day” or something like that that would tell you where you’re going to fall into a risk profile especially if you’re in a flipping business which is anything goes wrong in the house, people are going to sue you. That’s just the nature of the business after that.
Danny Johnson: Awesome. So I had a question, but I lost it there. The LLC naming, I think, was a thing, and it’s such a minor thing. When you’re doing a lot of properties, how are people typically naming all these individual child LLCs? With the property address or something like that?
Scott Smith: Sure. Yeah. That wouldn’t matter. If you’re going to exclude, if you just said, “Hey, I’m going to use the parent company. I’m going to file that,” and then just hold each of the properties directly in the name of the child series just to eliminate the whole trust piece from it, then you would just name the child series with the property address. It’d be like Worldwide Investment, LLC – Series 1, 2, 3 Main Street.
Danny Johnson: So when people a series LLC up with you guys and then they want to create a child ones, do you guys give them the template document to do that? Or do you recommend that they contact you guys to set up each one of them?
Scott Smith: Yeah. We gave everybody all of the templates so then at that point they have all of the documents and that will true for the operating agreement and everything. We don’t try to like hoard documents to make people come back to us. What we find is that a lot of people would just have us do them anyway because it’s just more efficient. They can focus on the deals they’re trying to make instead of trying to learn how to modify legal documents, right? But it’s up to you, right? So whatever you want to do. I really don’t care. I’ll set it up and I’ll give you all the stuff and you can figure it out on your own from there for all I care. I only care about making sure that you’re set up right and that you understand what you’re doing to be able to do it on your own if that’s what you’re going to do. But if you want to use those or not for that is really negligible. There’s not enough money in helping people from a business side of it. They’re trying to say, “We’re going to try nickel and dime people.” I think it’s annoying when I’ve been in that position. And so, that’s not the way I run my company.
Danny Johnson: Nice. Do you have any other tips that you want to share with everybody? This has been a very helpful episode. A lot of great information. Do you have anything else that you’d like to share before we close it up?
Scott Smith: Yeah. The only thing that I’d say is that the couple of key points on this one is that with the new taxes and incoming through, if you’re running everything through your company structure for passive investments, it’s going to give you that 20% tax deduction. That previously wasn’t available, but you’re going to have now in 2018 if you have your company structure set up. All of the taxes with the series LLC passed through one EIN number. So it’s going to be completely disregarded entity for tax purposes which makes into your tax fund. There’s no separate filing you have to do for that. It’s really easy to add your insurance to an LLC. You just keep the existing insurance policy in place and then add your LLC as an additional insurer or your trust as an additional insurer whenever you’re moving the property over. Transfers to the land trust from your personal name. If that’s what you’re having to do with your own property personally and you want to transfer it over, those transfers are not going to trigger the due on sale clause because it’s just transferred to a trust which doesn’t trigger the due on sale clause whereas a transfer to LLC directly would. That’s how it works around for that.
Danny Johnson: Nice.
Scott Smith: And the whole piece of this is you’re able to hold everything at all in one bank account for all of the money for your asset holding company as long as you’re keeping accurate accounting records for each individual property. And that’s just really tracking the incoming expenses for each property. We can hold all the money in one bank account as long as you can tell the court this is how we know which money belongs to which company. It’s the same principle that property management companies look also where they have one big pool of money but they have accurate accounting.
Danny Johnson: Nice. And that takes care of that operation like the cash flow from the one that’s owning the asset versus the one that’s operating, doing the operations.
Scott Smith: That’s right. Yeah.
Danny Johnson: Nice. All right, man. This is Scott. This has been awesome. I’m going to reach out to you for some more stuff as I have questions for him for what we’re doing here in our business. And I recommend others that are listening to this show, if you do have any of these questions or want to start doing these kind of things, contact Scott. So how can they find you? How can they contact you?
Scott Smith: So you want to come to the royallegalsolutions.com website. I have a contact form on there for everybody to reach out. Or you can email me at [email protected] or you can call us at (512) 757-3994. Danny, I’m going to send you some freebies in the show notes like the top 10 things every real estate investor must do to protect their assets as well as a link for people to be able to get access to all of our great legal services.
Danny Johnson: That’s awesome. I appreciate that. I’ll put that on the show notes for everybody listening. You can go to flippingjunkie.com/102. Get all that free stuff, information from Scott. Thanks a lot, Scott. Do you have anything else that you want to say?
Scott Smith: That’s awesome, Danny. So everybody keep making money. I’m happy to help you if you guys need it.
Danny Johnson: Awesome. [music] Have a great day. Talk to you soon. Bye.