RACHEL: Alright Scott, so thank you so much for coming on today. I’m excited to talk about asset protection for entrepreneurs. Before we dig into that can you just tell us a little bit about your background and your path and how you got here?
SCOTT: Yeah, so I’m an asset protection attorney. I work a lot with real estate investors and entrepreneurs. What we specialize in is how do companies need to operate. So that way they can operate most efficiently for what every individual person needs. But I started selling candy and doing lawn mowing when I was eight years old. I bought my first piece of commercial property while I was in law school, and had an active transmission auto repair business that we were running simultaneously flip that to graduate from law school without any debt. Went in to be a litigation attorney for couple years, suing insurance companies because the thing is people don’t realize insurance companies are a business of collecting premiums and denying coverage. And I was suing them when they didn’t pay out when they should have. And now I work with real estate investors and entrepreneurs on business structuring to help protect the wealth that they worked so hard to create.
RACHEL: Now, I love it. I think that this sort of topic of something like asset protection sounds so scary. So can you just give us an easy layman’s understanding of what asset protection really means?
SCOTT: Yeah, so the first thing you have to understand is that rich people don’t own things. Rich people have companies that own things. Right? I had a friend of mine who lost $3 million in real estate from a single lawsuit because he held everything in his personal name. And that’s when I first realized, I said, wow, holding things in your personal name is really just a catastrophe waiting to happen because you don’t control when lawsuits happen to you. It doesn’t matter how honest you are or how good of a person you are. It’s somebody else making a decision to do something. Right? So that’s when I first started to learn about the importance of it, and man, does it really, the tools that you can use are as simple as just LLC structures filed in one of the four key states that have the best asset protection laws like Texas, Delaware, Nevada, or Wyoming. And just that. And taking your assets and holding in that LLC protects you in case you have a lawsuit.
Some day you get into a car accident that exceeds the limit and liability of your car insurance policy or you’re running your business and somebody sues you personally ’cause of an email you sent them. They said that it committed fraud which insurance never protects you from an instance of fraud. Any of these things that happen. It’s just a simple LLC structure and now you can get sued all day long but people can’t touch your stuff which I think is pretty cool.
RACHEL: And you know, it’s funny the way you phrased it ’cause it’s exactly how I always talk about on the podcast. To people that are listening, guys, don’t be overwhelmed with the term asset protection. It’s the same ideas of what I’ve been talking about before to you, I’m just bringing Scott to come in and flesh out some things that we’re gonna dig into, exactly how to do all of this, but listen to what he just said. Is people who are trucking along and then all of a sudden they have an issue. I always say, you never have an issue until you have an issue. But you can’t undo it once you’re on the brunt end of a lawsuit. As an attorney myself I hate, and the word hate is extremely strong, I hate the feeling that I get when an entrepreneur calls me, not because you guys are calling me, but because you’re calling me because you now have an issue and your house is on the line, your personal stuffs on the line, and you’re the subject of a lawsuit. And you’re like, oh crap! What do I do?
Well you can’t put the genie back in the bottle. So that’s why we have Scott here to flesh out a little bit more on this asset protection. I wanna hone in on the very specific thing that you said about essentially being personally liable for the actions that entrepreneurs do. Can you explain a bit about that in a context that many who remember, that are listening, are really newer in business potentially, and don’t really understand what that means, and what the pitfalls are with that.
SCOTT: Yeah. Typically, what you should always be thinking about whether you’re a real estate investor or you’re an entrepreneur is just what are the best practices that major companies use, right? The question would be is, can I afford to do what major companies do and the answer is yes. Because of the new efficiencies that are built in with asset protection. With LLC structuring. So the one thing that every real estate investor and entrepreneur needs to do is they actually need two companies. They need one company that holds all of their assets. That’s all of your personal wealth, if this is your personal asset holding for your LLC or it’s all of your business wealth. Meaning, your trademarks, or intellectual property, any patents that you have, anything that has value to your company that you’d be sad if you lost. That’s one company.
Then you actually need a completely separate company that does all of your active day to day business operations. So what that looks like is that’s your face to the world that everybody’s gonna interact with, it’s gonna send all your emails, it’s gonna be what any of your contractors are gonna sign contracts with. Everything would go into that separate LLC. So what this really means in the net effective is that you have one LLC that owns everything, and it does absolutely nothing, because any time you do something you have liability. And then you have a completely separate LLC that does everything but it doesn’t own anything. And that’s that boogie man LLC called a shell corporation. But the reality is, reason why people use shell corporations is because they’re highly effective and they protect you. Why would we ever wait until we’re worth millions of dollars to put something in place relatively inexpensively, for less than a thousand dollars in some states, that you can have all of these amazing protections that all of the big businesses use. We could all be doing it.
RACHEL: Mm-hmm (affirmative). Agreed. I’m gonna pause him there real quick just to point you guys to a couple episodes where we can flesh out a lot more of the nitty gritty of this so that we can keep going on here. So we have episode 5, you guys can find it rachelbrenke.com, this is one of the layers of protection. And then episode 31 and 32 are very specific into business entities and what they are and how they work as well as how to set them up. And I bring that now because Scott, I wanna ask you, you keep saying LLC, and I have my own personal reasons why LLC is pretty recommended to many individual entrepreneurs. Is that your go to? What about corporations?
SCOTT: Yeah, LLC’s are always the go to for most all entrepreneurs. And because it’s usually the easiest thing to form and maintain. For most states you don’t even have to have yearly minutes. I like to use Texas because Texas doesn’t have any ongoing fees, it has strong asset protection, and there’s no yearly requirements of what you have to do to maintain the LLC besides just a simple franchise tax filing which takes like ten minutes to do.
RACHEL: Oh we know. Man, I’m in Texas … yeah.
SCOTT: Yeah, it’s the way to go for that. Now all of the other pieces, your other options, so like S corporations, C corporation, whatever, that has everything to do with taxes. It doesn’t have anything to do with protections. So really what you have to do is say, what’s my best tax treatment and then work backwards into LLC’s. Now if you’re beginning and you’re making less than say eighty thousand dollars a year in profits, that you’re pulling out to yourself every year, than an LLC is typically the right way to go. Once you start getting into that fifty to eighty or eighty plus range then you’re gonna wanna start using an S corporation to pull your income out. And those are more advanced strategies to look at with how do you do the holding and how does the money flow to the S corporation that you become your own employee of your own S corporation. And therefore able to avoid self employment tax. There’s a strategy into that.
But your number one bread and butter thing to do is just go ahead and get some LLC’s put in place. Then once you decide to say, well now I have to start looking at this tax piece, cool. Well all you have to do at that point is then file an election for your LLC to be taxed as an S corporation. So you don’t even have to do anything extra at that point. So you always just file an LLC, there’s no reason to do anything else.
RACHEL: I’m glad you brought that up because that is definitely one of my favorite strategic things that I look for. And I also use it as a qualifier when I talk to CPA’s. I dunno why, it just seems to be the holy grail I wanna see if they comprehend because I’ve seen many CPA’s, and guys, we’re not gonna go down this whole path of taxes, we’ll get back to actual asset protection, but if you’re thinking, oh, I’m at that threshold that he just mentioned, maybe I need to consider talking to a CPA. I’ve seen many CPA’s who will automatically go, oh, you need to get rid of the LLC formation, and you need to be a corporation in order to be taxed properly. And I’m not even a CPA and I know that’s not the way it works. You can be an LLC because that’s formed at the state level and take the election like Scott was just talking about at the IRS tax level. And it doesn’t require an actual structure change. I dunno. I just often like to see what CPA’s response to that be because I’ve seen many that make their clients do a whole conversion of the actual entity itself which isn’t needed to receive the tax benefits.
SCOTT: This is where it really pays Rachel to have quality professionals that assist you. Right? That’s one of the things why we specialize in just these areas. We have about two thousand clients and protect about $1.3 billion in assets across the country is because what we’re able to do is filter in everybody with a need and say what is the most efficient way for you to get started? Because a lot of people can’t start by paying ten thousand dollars for the super fancy stuff that you need when you’re really high level. They need something that’s simple that they can build on efficiently and that’s flexible to change with them. And that’s what my experience and Royal Legal Solutions experience is, is how do we do that. Because as an entrepreneur every single dollar counts right? So we have to make sure that we’re spending it efficiently for now and for how we grow in the future.
RACHEL: Yeah. I agree. And I think it’s kind of this cart before the horse type of thing. You don’t really know if the business is gonna make it so you don’t wanna do all the legal stuff. The things that Scott and I see all the time is that it doesn’t really necessarily matter how many customers you have. It could be one and you have a problem, and if you’re not protected that could be it. Your business is done before you even start. I mean, I’m sure you have stories like that. Do you have any actual numbers to maybe show people that the three hundred dollars for an LLC in Texas is well worth the investment versus what someone lost in a lawsuit?
SCOTT: Oh yeah. I have that one friend of mine who lost $3 million from a single lawsuit because he had everything held in his personal name. So you can spend very little and be able to have huge amounts of protection in place. It’s really just as simple as saying what’s the absolute minimum every entrepreneur should be doing is to just structure an LLC, move all of your personal assets into that LLC and continue to run the business in your personal name. So that way, something can go wrong, the client wants to sue you, whatever the case is, they’re gonna sue you, but you don’t own anything so the worst thing that happens is they hurt your credit score. They can’t touch any of your assets ’cause it’s held inside this other LLC. That’s not ideal because now they can hurt your credit score by suing you. So what you would do to eliminate that risk is establish that separate shell LLC and prevent them from being able to harm you directly. And that’s what that shell LLC would do in that case.
But you have it time and time again is that what you really want for a lawsuit protection is for people to sue you and you don’t care. Because the moment that you actually have to start caring about a lawsuit is when you start having to paying attorneys a minimum of five thousand dollars to start taking the case to defend you in court, and then to pay them continually over time. And if the case goes all the way through trial you’re usually spending about thirty to thirty-five thousand dollars. So how cool is it to be in a position where you can say, well I have all of these protections put in place, likely if the attack me I’m totally protected, and even if they do succeed with it they’re not really gonna be able to get anything at all.
RACHEL: Mm-hmm (affirmative). And keeping in mind, like he said before, if you are a defendant of a lawsuit you don’t get to just walk away from it. You’re committed to go through it. So hopefully you have your assets protected ’cause you can’t do any changes that are gonna impact that at that point. One thing I wanted to clarify is when Scott’s saying ‘in your personal name’ that doesn’t mean that you’re actually using your name in business. I know many people that have online shops or they’re bloggers and podcasters and they’ll set up under a different name, but they never really took any steps with the state. So what I mean by setup is they get the website, they get the iTunes profile, and they start working. You start taking money sponsors, selling products, etc. but you never took the steps to become an LLC or something else. You may not be using your own personal name but there is no distinction between you personally and that company that is under a different name. You’re all one. Everything can be touched at the same time.
So Scott, tell me, what would be the next thing, if some people are listening and they’re like, I’ve got my LLC on lock, what are some other steps for asset protection should they be mindful of?
SCOTT: Once you go through that first LLC step, the next thing I would say it’s probably a good idea to have insurance. It’s appropriate for whatever the activities you’re doing. And that’s gonna be known by your community or organizations that you’re associated with. They’re gonna say, hey, you’re doing this, you probably need this type of insurance. They’re always gonna have recommendations for you one those types of policies. You never wanna rely just on a holding company if you can at all avoid it ’cause insurance is really good at getting rid of all of the nuisance people in your life. ‘Cause it just dumps all the problems in their lap. The reason why we don’t rely just on insurance, even though they’re affective say 80% of the time, is that 20% of the time they’re not effective. They won’t cover the claim or it’s too expensive for it. And then that’s when our asset holding company comes in to help protect us to make sure that we don’t have catastrophic loss from a lawsuit with that.
Now once we start looking at what you can do with LLC structures then it can get really cool really fast. You can start holding assets anonymously. You can hold your companies anonymously. You can start looking at series LLC structures especially if you’re a real estate investor to compartmentalize every single asset for free while having one bank account and one EIN number etc. Even I’ve seen even entrepreneurs use a series LLC structure to be able to launch multiple businesses without having to pay additional filing fees and operating fees and all of that for each new business they launch.
RACHEL: I love it. I love it. So those of you that are very similar to me that build brands over and over in multiple industries, that right there is the answer ’cause that is what I was gonna ask anyways, is the answer what you would need to do to help avoid even more administrative burdens and money outlay. You’re gonna have some, but at least there are structures available for you guys to be able to set up in that capacity.
We’re looking at LLC’s and we’re looking to multiple LLC’s here and then also having the proper insurances in place. Are there any other steps that the entrepreneurs listening can go and do and research today that can also help drive them towards a more protective position?
SCOTT: Yeah, I would really say the best information that exists is probably gonna be on the royallegalsolutions.com website. We write a lot about this to outline for people, just saying here is the different levels that you can have for how much risk you want to take on. ‘Cause innately that’s what we’re all doing is saying how much risk do I want to have and what can I actually afford and what makes sense for me? So what we’ve done is a really good job is outlining here’s all the major strategies people use, here’s our approach the way we think about it ’cause we’re all entrepreneurs ourselves in the company. We all own businesses actually before we started working together at Royal Legal Solutions so we actually understand a lot about how do entrepreneurs think through what’s going to be the right decision making for them. So then you can select the level that makes sense to you, and we also have consultations that we offer to speak to a professional if you need help and guidance on what’s gonna make sense for you given where you’re at now and where you project your growth in the next 3-5 years.
RACHEL: Awesome! Well, Scott, thank you so much for coming on The Business Bites today! Giving them a little bite of content on how they can protect their assets. Guys, you can find all of the show notes, all of the links to Scott’s website, this is episode 76, so it’s gonna be at rachelbrenke.com/epi76. Hop over there, check them out, ask any questions, get involved, get protected ’cause there’s no sense in building this business if you’re just gonna lose it.
Scott Royal Smith is a real estate investor and asset protection attorney in Austin, TX. Scott became an entrepreneur while still in law school, purchasing and running an auto mechanic shop, to pay his way through school. After graduating, Scott begin his law career as a high-stakes corporate litigator. He spent the last 8 years of his career analyzing real estate investment and asset protection. Today, Scott is the Founder and CEO of Royal Legal Solutions. A ﬁrm he built to offer tax, business and legal strategies to clients all over the U.S and Canada. He continues to educate the public on asset protecting strategies to help circumvent debilitating lawsuits for his clients.
Rachel Brenke is a lawyer, author and business consultant. She is currently helping professionals all over the world initiate, strategize and implement strategic business and marketing plans through various mediums of consulting resources and legal direction.
Hi, I’m Rachel Brenke
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