How to Protect Your Assets through Real Estate Business Operations – Video
Presenter: Anybody hear advertisements about this state or this state? About forming an LLC. Wyoming, Delaware. Right?
Participant 1: You still have to file in California, in order to do business there.
Presenter: Very good.
Participant 2: Every year.
Presenter: Yes. There is a weather tax, ladies and gentlemen, in the Franchise Tax Board. It’s here. That’s a little bit later in the slides, but they are hot and heavy on exactly that. How do they get the information? Just as a practical matter, how do they get the information? It’s on the federal return. What does California require you to do?
Participant 1: Attach or send copy of it.
Presenter: Attach a copy. It’s not hard for them to find out that you have an entity outside the state of California. Some quick rules. The IRS says there’s no such thing as an LLC. Everyone knows that, right? Right?
Participant 2: Right.
Presenter: It says, it’s either a single member, which is a pass through, which means you’re filing schedule E. If you don’t do anything, what’s the default? Partnership. You have to file special documents to have it treated as though it’s a corporation. If it’s a corporation, then you file additional documents to have a sub-S tax rate. Everybody understand that?
Presenter: It is one of those things. Again, to give you knowledge, it’s a little out of context, but were taking it out of context. The Franchise Tax Board, in the past, there was a 10% penalty for late filing of the franchise fee. For an LLC, how much is that? I only ask trick questions. What’s the answer? It depends. If gross receipts are $250,000 or less, it’s $800. If gross receipts are from $250 or $500, how much is it?
Participant 2: $2500.
Presenter: Not quite. It’s $800 plus $900. The variant slide goes through all the rates. Be aware of that. The Franchise Tax Board has said, “If it’s taxed as a partnership, and even if you have a property management in another state, and even if the bank accounts are in the other state, and even if you don’t get any phone calls, any emails, you go four times a year to that state to transact business, what do you think the Franchise Tax Board says? You owe California gross receipt taxes because the possibility of managing is sufficient connection with the state of California for the state of California to tax you. Personally, I think it’s unconstitutional, but California has a history of that. Anybody remember that California was taxing retirement plans? “Wherever you move to, you earned in California, we’re going to tax you.” What stopped them?
Participant 2: The Federal Court.
Presenter: Supreme Court case saying, “No.” That’s what’s going to take this.
Participant 3: Is anyone challenging it yet?
Presenter: No. Can you afford $5 to $10 million to take it to the Supreme Court? I can’t.
Participant 2: Are those stretched over an aggregate of your entities?
Presenter: It’s per entity. If you have a Nevada series LLC, the Franchise Tax Board says, “Each series is a separate entity.” The real problem is, what happens if you had an LLC for 15 or 20 years in another state. You’ve never reported here. What do you do?
Participant 2: Kill it.
Presenter: Not speaking as an attorney, and because we’re on tape, I will repeat your answer. You kill it, and probably would form another one, and then report it. Again, you have to figure out what you’re going to do. They are coming after you. Why do I have a slide for signs?
Participant 2: Symbolism of shedding your clothes or something.
Presenter: Yes, you have a company car with a logo on it. Where’s that company car not supposed to be? Picking up children from soccer practice? Picking them up from school? Going to the grocery store? Going to the dry cleaners?
Participant 2: These all are part of advertising.
Presenter: Because you’re what? Personal use. If you have a company car, talk to the gentleman in the back. You actually need a separate writer on your policy to cover the company car when you’re on personal use. Additionally, if there’s a lawsuit against your company, and they have proof that you were treating it as a business entity, what can they do?
Participant 2: Go after your assets.
Presenter: Pierce the corporate veil, and go after your personal assets. If you start paying personal bills from that checking account, it’s just the slippery slope, and you have to treat it as though it’s a third party. I write a W-2. I write a 1099. I paid my personal bills with a different account. If I put money in, there’s a promissory note from the company I pay, the company pays me back with interest. You treat it as though it’s a third party, because if you don’t, the courts won’t. That’s the problem with signs. Charging order means, you stand in the shoes of the individual.
Doesn’t mean they have any management rights. Doesn’t mean they have any voting rights. They simply have the right to get money when it comes out. Again, assuming you have the right operating agreement.
Participant 3: It has nothing to do with asset protection.
Presenter: It has absolutely everything to do with asset protection. If there is no profit, how much gets paid out to the owners? Nothing. They stand in the shoe as an owner. No management responsibilities. No right to say anything. That’s why you want the charging order. Corporation, they can get the stock. Once they have the stock, there’s certain statutory rights. That’s why people use LLCs.
Participant 1: So how do we get a charging order?
Presenter: You have to go through an entire lawsuit, get a piece of paper signed by a judge that says, “This person owes you $100,000.” Then you apply to court, to get a charging order against those membership units that that individual owes. Charging orders against you. You’re being sued. You want to protect your assets. Because there’s no guarantee of money coming out, and it can take a while, you can usually settle for less on the dollar. That’s the goal of almost all asset preservation.
Just because you’re in this current state. Anybody have an LLC that was formed before 2014? You knew all the rules changed January 1, 2014. California adopted the Uniform LLC act. There are some really strange provisions that are default provisions. Anybody here want a majority of the members to be able to throw you out as a manager? That’s the default provision, unless the operating agreement says something different. If you find- and assuming it’s not family, you have some other people with you. You have an absolute duty to give any offer to the LLC first. If you find a really good real estate deal, and you want to buy it in your own name, but you’re part of an LLC, your duty now is a loyalty to the LLC. You have to offer to the LLC first.
Unless it’s changed by the operating agreement. There’s just a multitude of things that changed in California as of January 1, 2014. You need to update your operating agreements. Welcome to California.
Nothing’s the same. Again, fiduciary duty has changed. These are all the duties that have changed. Voting requirements, consents, managers, those are all the things that have changed under the revised Uniform Liability Company Act. If you thought you had everything taken care of, you no longer do. You need to go back and change your operating agreements. What’s that statute that restricts the ability of members and managers to waive the duties of loyalty, care, good faith and fair dealing. The operating agreement may change the duties of the managers and members called?
Participant 2: The full employment act for attorneys?
Presenter: And accountants, just like any tax bill, right? What’s the real name? Full employment for attorneys and accountants, or tax preparers.