Posted by Redline on March 10, 1999 at 13:18:55:
See the above messages also.
Corporate Structure? - Posted by SCook85
Posted by SCook85 on March 10, 1999 at 09:18:36:
One of the thins I was looking to accomplish at the convention was to come up with the most effective corporate sructure. After listening to Bill Bronchick the following structure seemed to make a lot of sense to me. Let me know you thoughts:
Main Corporation set up as a C-corp. Have an LLC that buys and sells property beneath it with the Main corp as the sole member. Have another LLC beneath it for financing with the Main corp as the sole member. Have another LLC beneath it for holdings, again the Main corp would be the sole member. Within each LLC properties will be held in land trusts with the LLC as the beneficial interest.
You may have to draw this out on paper to make sense. I did pose the question to someone at the convention who said that I should not have my holdings LLC beneath anything. Can anyone explain why I would not want to do this.
The goal I am trying to accomplish with this set up is to keep certain parts of my business seperated, yet have only one company for the purposes of tax reporting.
All input would be appreciated.
SCook85
Fairly Long Answer - Posted by JHyre in Ohio
Posted by JHyre in Ohio on March 10, 1999 at 11:18:41:
Hi Steve!
Congrats on blue vase award- it sounds like if it was ever deserved, it was deserved by you. I will gladly discuss your question, but you need to get an attorney or CPA to do the in-depth analysis required. No mere internet post can properly answer your question in all of its complexity- and trust me, what you’re asking ain’t simple.
Let’s start with Kiyosaki’s structure. While we do not know all of the details, we know that he uses 3 separately-owned corps. He likes corps because they can take certain deductions not available to other entities and refrain from distributing funds and have an initially low tax rate. Basically, he reduces (or at least attempts to reduce)the corporation’s income to $50,000 or less, where it is taxable at only 15% AND avoids employment taxes. He does not distribute in the form of dividends, so he avoids the double-taxation that would result. To do this legally, the retained funds MUST be reinvested. These reinvestments will produce income which must in turn be sheltered. To keep a corporation with growing income sheltered, one must generate an increasing amount of deductions that do not create income for the shareholders (so salary doesn’t cut it). Thus, one must generate a HUGE amount of creative deductions. For example, a Rolex sales prize in a one-man show is very creative and very aggressive. In fact, if I were an IRS auditor (Ick! Perish the thought), I would nail that in a heartbeat. My guess- it is only that- is that Kiyosaki is aggresive with the law AND with the audit lottery. What I mean by “aggressive with the audit lottery” is that he takes deductions that are VERY VERY VERY VERY aggressive on the theory that:
a) I won’t get caught and
b) I will negotiate a very good settlement if I do get caught.
This is a common stance with entrepeneurs and is a good bet probability-wise. The problem is, if your number comes up, the penalties can be very severe.
In lieu of such an aggressive stance and Kiyosaki’s ability to produce beaucoup income, the corp would eventually run out of deductions and have to pay the high tax with the possibilty of incurring double-taxation down the road. That would be extraordinarily inefficient and expensive.
Two agressive but not hyper-aggressive ways around this discussed by Kiyosaki:
-
Buy depreciable things and use the depreciation to shelter the income. As Kiyosaki mentioned, he’s having a hard time doing this, because he must buy massive amounts of property to shelter his considerable income. I would also add that the property must be highly leveraged or the depreciation would offset income from the property and never apply to any other income. The property is never sold, only 1031 exchanged. This leveraged structure (it MUST be for the depreciation to shelter other income) has the risks that usually accompany leverage.
-
Kiyosaki’s current income producers- making little companies into big companies- is a different but tax efficient twist. Kiyosaki owns the stock. If it goes up and he sells, he will do so at low capital gains rates- which is why he probably owns the stock of his insider deals directly and NOT through a corporation. Putting that stock in a corporation would subject it to high corporate cap gains rates AND double taxation.
Lastly with respect to Kiyosaki, he shifts income from corp to corp. To do this, the other corps must generally be owned by others, so a serious trust factor is involved. In addition, using “consulting fees” and the like to shift income is VERY VERY VERY aggressive. Again, if I were an auditor, I’d have a field day. In assessing the risk, bear in mind that most non-Hyre auditors are not sophisticated enough to see what’s going on or have the tenecity to follow up if they do find it. If they do stumble upon it, they will probably settle to avoid litigation. Thus, the probability of running awry of the audit lottery is low (1 auditor per 7,000+ people). The consequences if you DO get tagged can be high, especially if outright fraud is involved. Otherwise you just negotiate a settlement.
Well, enough on Kiyosaki.
I do NOT like your structure. Having a corporation at the top of the pyramid means that you must keep its income below $50,000 or pay high rates. To do this (i.e.- generate LOTS of VERY aggressive deductions) AND avoid double taxation, you will need to pay for VERY good tax help. If you are asking this question online, you do not have such help! (No offense intended- remember I’m one of the people that respects you and wants to imitate your accomplishments). If you changed the mother corporation to an LLC, your structure would make alot more sense. In fact, here is the (tenative- I need to research certain related-party holding rules) structure that I intend to use:
Mother LLC owns:
Mobile home flipping corp in Ohio;
Mobile home flipping corp in Indiana;
Mobile home flipping corp in Michigan;
Lease-Option flipping corp in Ohio;
S-Corp or LLC to hold propoerty in Ohio.
Lot’s of returns to file? You bet. Even if I paid someone to do my returns, the savings would justify the structure. The corps are flipping companies that reinvest proceeds at a high rate of return. I have a business purpose for having separate mobile home corps. The S-corp (could also use an LLC) passes passive income through. All income- to the extent distributed- goes through the LLC, which keeps an admin fee for overhead- it is simpler to deduct home office, computers, etc. in one entity that pro-rate among several. I’m still refining the structure, but it might work for you AFTER you consult an attorney or CPA to adjust for your personal circumstances.
Bottom line: Having any entity below C-corp provides extra liability protection and simplifies reporting but almost certainly does NOT minimize taxes. I submit to you that reporting is a secondary consideration BEHIND reducing tax bite, so I am not personally partial to your structure.
Hope this helps & best wishes,
John Hyre
Re: Corporate Structure? - Posted by Dan Fink
Posted by Dan Fink on March 10, 1999 at 10:28:58:
Steve,
Robert said he did not like LLC because the were up for gov control, Only because the corp structure has so much lobbing power IE ford ibm ge gmac ect. Not because they have problems.
each has their own place I buy every property in a llc even if i am going to flip. They do have some tax problems that can be fixed by using a c corp as a parent however when the c corp profits more the $ 120,000 i think it is tax wise cheaper do do a LLC and pass it through to you or a second entity. As with anything if you make enough money sooner or later you going to have a tax problem.
I feel that notes should be held in a pension plan to grow tax free and use that plan to fund deals as it grows.
Clinton is not doing the work so he should not get any benifits.
There are a million twist to anything. iff youn want call me and we can beat it back and forth. And i can tell you much better then i can type it
Dan Fink
Re: Corporate Structure? - Posted by Redline
Posted by Redline on March 10, 1999 at 09:58:47:
Steve - I can’t answer that question but think about this: If you remember when Kiyosaki (sp?) spoke he was saying how he didn’t like LLC’s because he thought they were vulnerable to government intervention. He said he only used C-Corps because they were the most bullet-proof. (which seems to disagree with what alot of others have said).
Just a thought.
RL
Re: Fairly Long Answer - Posted by David Alexander
Posted by David Alexander on March 10, 1999 at 12:39:13:
John,
Why not A Mother C Corp and Lp’s as the sattellites, it seems to me this is what all the big boys do.
David Alexander
Re: Corporate Structure? - Posted by JHyre in Ohio
Posted by JHyre in Ohio on March 10, 1999 at 11:32:40:
Hi Dan!
What Kiyosaki proposes for small corp- his are relative to the big boys- is not necessarily applicable to all corps AND VICE-VERSA. I am familiar with big corps- in fact more so than with small corps. What IBM gets from lobbying will probably not do small corps- or even non-IBM big corps much good. LLC’s are hugely popular with the small business lobby, as are S-corps. This is why Clinton’s attempts to screw S-corps and LLC’s have not- and for the forseable future shall not- pass. In fact, the trend is in the other direction, with S-corps being juiced-up top compete with LLC’s. Even if the winds change (they do so quickly in DC), the idea is to get grandfathered in before any changes. Big changes without grandfather clauses (e.g.- 86’ Act) are comparatively rare. Plan based on the current law. For example, I would SERIOUSLY rethink your flipping through an LLC unless you’ve made the corporate election. I agree that with money comes a tax-problem, but such problems can and should be minimized. Clinton doen’t deserve a dime of my money and I will fight like a demon to keep it from him and his cronies.
Enjoyed meeting you, give me a private e-mail if you wanna chat.
Cordially,
John Hyre
I think it was Britton who said that… - Posted by Jim Beavens
Posted by Jim Beavens on March 10, 1999 at 12:36:32:
I don’t remember Kiyosaki making any comments positive or negative about LLC’s (I just remember that whenever anybody asked him about a specific structure, he’d always brush them off and tell them to get a good accountant ;).
But I do remember Scott Britton saying how he didn’t like LLC’s because they’re too new and not used by the big boys and thus the government could potentially screw them up (actually, I can think of a couple big LLCs…one of which is a company called Pandesic LLC, formed by Intel Corp and SAP).