PODCAST OVERVIEW
Goosmann Law Firm Partner and Omaha Business Attorney Andy Simpson, and Host Jeana Goosmann discuss what an LLC is and why you should form one for your real estate ventures. In this episode you will learn:
- Why form an LLC? Tax advantage
- Co-Owning property – give examples
- Owning multiple properties
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TRANSCRIPT
Goosmann Law Firm :
Do complex legal issues hold you back? Let's get energized and bring clarity to your top legal questions. This is Law Talk With the Flock by Goosmann Law Firm.
Jeana Goosmann:
Hi, I'm your host Jeana Goosmann for Law Talk With The Flock. I am a CEO, managing partner, and author at the Goosmann Law Firm. And I'm so excited to have with me here today, Andy Simpson, as we help navigate your way through the law, your business and life as a leader. Andy, we're going to be talking about LLCs and serial entrepreneurs and when they need to form a company.
Andy Simpson:
Sound good. Sounds great. Good morning.
Jeana Goosmann:
Good morning. Yeah. Happy to have you on again.
Andy Simpson:
Happy to be here.
Jeana Goosmann:
And this is stuff that we deal with all the time with our clients. Isn't it?
Andy Simpson:
Day in and day out. Yes. Representing business owners, small, medium, or large. Creating entities depending on their situation is an absolute must.
Jeana Goosmann:
So at the core, we tend to form LLCs or limited liability companies. Let's just get some foundation work out . What is an LLC?
Andy Simpson:
So an LLC is a limited liability company, as you said, that's the name of the entity, but it's a legal entity. That's freestanding , has his own tax ID number. And , you're able to fund it with certain business assets to provide a business structure in , in a simple form.
Jeana Goosmann:
Sure . And it's kind of a more modern approach compared to the corporations. I know when we were in law school, they were like the new hot thing. And that makes me really old now
Andy Simpson:
It is because the limited liability company act was relatively new in comparison to the business model corporation act. But , the real advantage we see in them are their ease of transferability. And as opposed to a corporation where you can sometimes end up with a double taxation situation, an LLC is a pass through entity for tax purposes. So it just flows through to the owner's personal tax return. So those are more advantageous in a small, you know , closely held business situation in which we see more of here in our, our practice in particular , in real estate development.
Jeana Goosmann:
Alright , there's a lot going on in that, that I'm going to help break down. So when we talk about a double taxation , what does that mean?
Andy Simpson:
A corporation, a true corporation. It gets taxed at the corporate level. And then when it distributes where it makes distributions to shareholders, the shareholders get taxed as well. People don't like that. They do not no.
Jeana Goosmann:
There's more tax and everybody hates tax. We can all agree on that.
Andy Simpson:
That's right . Yeah . Well, that's one of our jobs to try and help out with those sorts of things. So an LLC on the other hand, because it's a pass through entity,
Jeana Goosmann:
Wait, wait real quick. What's this pass through mean, what's this pass through business?
Andy Simpson:
The income and the deductions get passed through to the owners. They don't get taxed at the entity level at the LLC level. So it gets passed through to the owners and there's one taxation as opposed to a double taxation in a corporation setting. So
Jeana Goosmann:
Excellent. So when we set up these LLCs, I think we check a box and that helps make that pass through flow like that. That's correct. Yep . Awesome. And that's a big advantage of LLC. In addition, it's not quite as formal, usually as a corporation, either like the board of directors don't necessarily get together every month until they mature as a business.
Andy Simpson:
That's right. Yeah. So in a corporation you have to, in both entity is a corporation or limited liability company. You have to keep with formalities, but a corporation requires annual meeting minutes for shareholders and directors and or special meetings for any action. The corporation may take an LLC, does not have those stringent requirements. So it's easier to operate from that standpoint.
Jeana Goosmann:
And we help people with their corporate maintenance at all levels. Don't we absolutely, in fact, we have a whole program called corporate maintenance. We do, I think we have several paralegals that that's their full time job is to maintain these companies.
Andy Simpson:
Yeah, that's right. And , and it really does depend on what the business owner, what their business is and how they're operating and, and what is the best structure for them. So it's not to say that an LLC is better than a corporation and a lot of service industries. We put people in corporations for that purpose. But we do a lot of LLCs around here , because of their ease of use and the taxation benefits. That's true.
Jeana Goosmann:
So I think a lot of times too, when I'm dealing with a serial entrepreneur, higher net worth person, I find that they have assets that kind of make me cringe when they're not inside of an LLC. Let's talk about that for a minute. When do we recommend that we form an LLC? Maybe somebody has a farm for example, or a large building that they own, and they own it in their personal name. Why would we want to put that inside an LLC?
Andy Simpson:
So the reason why we do that is we shield that person's personal assets from liability. And so I see it a lot in my real estate practice. The example you just gave, we had a new client come in last Friday who had substantial farm ground in their name alone. However, they're not occupying that farm ground. So they're renting it out to third parties who may be renting that out to other people who aren't exactly lightening strike, whatever it may be. If it's in their name alone, then if there is a claim against that property owner, it is against the personal assets of that particular owner. If we put in an LLC, we fund that LLC with that particular asset. And then basically the only claim is against the asset of the LLC, which is that particular farm. Not that owner's high wealth owner who has a various assets. We don't put those at risk. So that is the primary reason why we set up LLC is to shield those assets from liability in that instance.
Jeana Goosmann:
And then we're also going to probably want that particular individual to have a trust that they own all these assets in and then their trust will own their interest in these different LLCs.
Andy Simpson:
That's right. And so it does add for ease of administration upon death, because if you have assets in different States, for example, you can set up a trust and put the other state assets either in the trust or in the LLC. And you can upon death It allows for a little bit more ease of trust administration in that room. Yeah .
Jeana Goosmann:
I took us down a rabbit hole with that one, but go back to the main issue. So another area that this comes up a lot is when people get into business with somebody else, or they're going to buy property with someone else, whether that be a lake home again, an investment property, but if , rather than just go co own it individually, wouldn't we want to form an LLC,
Andy Simpson:
That's right. And for two reasons in Nebraska, we see it a lot in farm grounds . So if I were to own farm ground with you individually, and we don't put it in an LLC and we own it as what they call tenants in common, one of us can force the sale of that farm ground. When the other one didn't want it, we call that a partition action. So a lot of the times I'll form an LLC for those particular assets to eliminate that. So the LLC then provides structure for a party who wants out of the business. That's a buy sell within the operating agreement as opposed to a forced sale, but just in general , the LLC provides for , um, a structure by how the business is run. Who's in charge, who's the manager , how do we do certain things? And so it's a business. We should run it like a business and the LLC provides that structure. So
Jeana Goosmann:
Absolutely, and rather than just, you know, getting into business with buddies and everybody gets along on the front end, but it's when something comes up, it really helps if you have an operating agreement to turn to.
Andy Simpson:
That's right, or when somebody passes away. And so if I want to be in business with you, that doesn't necessarily mean that I want to be in business with your kids or your spouse.
Jeana Goosmann:
Absolutely. And there's all kinds of those triggering events that we think about when we're doing those buy sells. And it really helps to have the entity as the base .
Andy Simpson:
Absolutely. Yep . The one key is to make sure it all gets signed. So we see a lot of that, the buy/sells aren't signed and they're not done formally. And so that's why you need an attorney for a little bit of a work in prevention on the front end can really help eliminate or make sure that those problems don't arise on the backend . So, yeah,
Jeana Goosmann:
Let's talk about, you mentioned real estate and I know you do a lot of real estate development and otherwise, but one other area that I think we encounter quite a bit is when an individual owns multiple properties. And a lot of times, at some point in time, they will get to a stage where we want to form different LLCs for the different properties and then have a holding company. Let's talk a little bit about how are we going to advise people when they have multiple properties?
Andy Simpson:
Well, it really does depend. We want to work closely and hand in hand with our CPA in that instance. So that way we're coordinating all the different tax ID numbers and make sure that it works from a tax perspective, but , um, it, it allows them to manage things so we can compartmentalize the liability that we talked about earlier , um, to that particular asset. So let's say we have 50 rental homes. Maybe we set up not 50 LLCs, but several of them. And then the liability is only limited to the assets of that particular LLC, where then we can have the holding company that manages all of them as a whole. So that's usually the instance. We see them in our rental , um, large rental , uh, holding companies , uh , where we set up multiple LLCs. So that way we kind of compartmentalize the liability to those assets
Jeana Goosmann:
And holding companies. Aren't just for the fortune 500, are they?
Andy Simpson:
No, not at all. No. Um, it , we see it a lot. Um, why there, whether it be sort of an ag lending company , um, it just allows , one umbrella company that to manage all the assets.
Jeana Goosmann:
And I think a lot of our clients, I call serial entrepreneurs because they do, they have multiple properties and different business interests that they get into. And then when we're looking at their estate planning, we might have a schedule that shows they have 17 different interests in different companies and keeping track of all that is a big part of what we do too. Isn't it ?
Andy Simpson:
That's right. Absolutely. And how it fits into their overall vision, moving forward with their business and their estate plan , when they're no longer here. So yeah.
Jeana Goosmann:
Thanks so much for talking about all this great stuff with me today, Andy. I think we've got a lot of color to LLCs and when we formed them.
Andy Simpson:
Yes. Thank you.
Jeana Goosmann:
Thank you so much for listening to Law Talk With The Flock, have a great day. Go make it worth it.
Goosmann Law Firm :
Thanks for joining us for Law Talk With The Flock by Goosmann Law Firm. We hope you feel energized and ready to soar past your goals. Become a flock fan and subscribe to our podcast for weekly episodes. Learn more at GoosmannLaw.com.
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