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©2020 by The Nexus Group, LLC

Investment Business Recommended Phases & Structures:

Investing in assets, real estate, notes, and other instruments is a great way to grow your business. The challenge is protecting your assets from liabilities associated with you, and protecting you from liabilities created by your assets.    

 

Because of this, individuals and companies that invest use a multiple entity structure for their business to help segregate and protect their assets as well as greatly reduce the tax burden. 

 

We have analyzed the best corporate structure for investment businesses, and have identified the three different and distinct phases of corporate growth specific to investment companies. 

 

Next, we will present the different phases, and we will show you, based on your current position, what phase you are in, and then we are going to outline the corporate structure recommendations that will afford you the most asset protection and tax reduction - while keeping in mind your goals and the phase you are in presently.

  1. LLC "S" Election

If you have one of the following (Phase 1):

  • You own valuable Business Assets, and or Investments

  • You own dangerous assets

Then Phase 1 applies:

Phase 1 is to set up an:

  • "S" Elected LLC or Corp, and

  • use it as an holding company for your assets

  1. LLC "S" Election

  2. LLC "C" Election

If you have one of the following (Phase 2):

  • You will be investing in multiple assets, and

  • You will use your personal funds to purchase assets or investments 

Then Phase 2 applies:

Phase 2 is to set up a different:

  • "S" or "C" LLC depending

       and

  • use it as a Lending Company for Asset protection

  1. LLC "S" Election

  2. LLC "C" Election

If you have one of the following (Phase 3):

  • You don't need all of the income personally, and

  • You will be purchasing new assets with profits taxable this year,

       and 

  • You do not want all the income from your assets being taxed at your bracket

Then Phase 3 applies:

Phase 3 is to your "C" differently:

  • use it as a management company for your holding company(s) to create tax savings

 
Investments Structure - Phase One

Investment Structure - Phase One

 

Protecting Valuable Assets:

 

If you or your business own valuable assets, it's a good idea to make sure that those assets are taken care of and protected. As you may know, having insurance is often the first line of defense when trying to protect your assets, but what if the insurance company decides not to pay? 

 

One way to protect your assets is to put your assets into a business entity (normally an "S" elected Limited Liability Company - "Asset Company"). When you put assets into a business entity the entity acts like a shield from you and protects the assets from your liabilities . For example, let’s say that you were driving down the road and accidentally caused a terrible car crash. If your insurance company doesn't cover the full amount of damages or doesn't pay out at all, then your assets would be at risk if they weren't in a Limited Liability Company. 

 

The Asset Company would protect your assets from being taken from you via what's called a "charging order". A charging order is a legal remedy which basically states that if you are personally sued, the person or business suing you cannot seize ownership of an LLC from you (and by extension the ownership of the asset).

 

This strategy is great if you own valuable assets, real estate, or additionally, in situations where a business may currently own its own tools, machinery, equipment, and/or specialty items. If this is the case, one strategy is to move the assets out of the business into an LLC {an "Asset Company"), and have the main business ("Operating Company") lease the equipment from the Asset Company. This is effective for two reasons. 1) if you or the Operating Company are ever sued, the assets cannot be taken from you. 2) depending on your tax position, usually this relationship helps increase your tax savings.

 

Dangerous Assets vs. Safe Assets:

 

Protecting an asset from being taken from you is different than protecting you from the liabilities associated with your assets. 

 

Dangerous Assets: 

 

Dangerous assets are assets that can bring a lawsuit to you. A great example of this is real estate. Individuals can get hurt on your property and sue the owner of the property. If you are the owner of the property, they are going to sue you personally. Dangerous assets include real estate, automobiles, machinery and equipment, etc.

 

Safe Assets:

 

Safe assets are things like intellectual property, stocks, bonds, cash, insurance receivables, furniture, non-dangerous equipment, etc.

 

* Rule of thumb - do not mix Dangerous Assets and Safe assets in the same LLC or Corporation.

 

Although an LLC can protect you from the liabilities of dangerous assets and can protect the assets from your liabilities, it cannot protect its assets from its other assets. For example, if an LLC had 5 properties and one of the properties caused a lawsuit, the party involved would sue the LLC and not you individually. This means that everything that the LLC owns is available to the party bringing the lawsuit. 

 

If you have multiple real estate properties you will need to think about what your comfort level is and act accordingly. What we mean is that if you have 3 properties that have $100,000 of equity per property - you should ask yourself if you are comfortable knowing that if the LLC is sued directly you could possibly lose $300,000 worth of equity. If you are ok with that scenario, then you may want to put all of the properties into one entity. Another factor to consider is the type of property. For example, duplexes and multiplexes have a higher risk factor for potential lawsuits than single family residences. 

 

Recap:

 

Set up separate "S" elected LLC's for safe assets and dangerous assets.

 

Logistics:

 

The best way to get funding for your Investment LLC's in Phase One is to personally loan money to the Asset Company, and then to have the Asset Company purchase the assets. This allows you to contribute those loans to a "C" elected management company in the future.

 

If you have a "C" elected Management or Investment Company ("MI Company") that does not deal directly with the general public or entities that you are not an owner of, you can have the money loaned from that MI Company to your Asset Company. This is the advanced strategy outlined in Phase Two of the Investing Company structure.

 

Why "S" Elected?

 

"S" elected means that the profit or loss flows down to you as an individual (so its taxable to your "S"elf). While this might not sound ideal, you will be able to save self employment taxes - and this amount is 15.3% of your income. You will see the estimated amount that this election will save you in a couple of pages.

 

Why Not "C" Elected:

 

The other option for taxation is "C" elected taxation. This means that the business taxes are calculated at a flat 21% (so its taxed at the "C"orporate level). The problems with a "C" elected Investment Company are that 1) any of the profits after tax need to be spent on company expenses or expansion, and 2) if there ever is a lawsuit all of the funds that are in the company are available to satisfy a judgement. That means all the money that accumulated in the company can be seized to fulfill a judgement if the company lost a lawsuit. So to leave money in the company is not ideal, and therefore "S" elected taxation is preferred for Investment Companies given their exposure.

 

In Phase Two and Three we discuss employing a "C" elected investment company that doubles as a management company.

 

What Documentation:

 

In Phase One of an Investment Company structure include:

 

     - Resolution Authorizing the Borrowing of Funds

     - Loan Agreement / with Signed Note

   

Monthly Activities:

 

     - Receive invoices and create bills

     - Complete company books

     - Maintain minutes and resolutions

 

First of the Month Activities:

 

Individual or MI Company:       

 

1. Send out loan statement to Asset Company for monthly payment

2. Receive the loan payment

 

Asset Company:       

 

1. Receive loan statement and create bill (if applicable)

2. Pay loan payment (pay to individual or MI Company if there is a loan with Asset Company) 

 

Investment Structure - Phase Two (Business Assets)

 

ASSET PROTECTION: Separating You from Business and Creating Encumbrances:

 

Depending on your resources Phase Two may be where you start out with your investing structure. 

 

Phase One of the Investment Company structure calls for LLC's to hold the assets that you are trying to protect from other assets, as well as from liabilities that come from yourself. Also, we separated dangerous assets and safe assets by holding them in Safe Asset LLC's and Dangerous Asset LLC's.  

 

Phase Two adds another layer of asset protection, as well as supreme cash flow control capability. Instead of personally loaning money to the Asset Company to purchase assets, you would set up a "C" elected LLC to act as your personal investment company. You would capitalize / loan money to  the Management/Investment Company ("MI Company"), and it in-turn would lend money to your Asset Company to purchase the asset.

 

When you create this multi-level entity structure you enhance your asset protection capabilities greatly! If anyone ever sued any of the Asset Companies, the Asset Companies would already have an encumbrance on them through the loan from the MI Company.

 

Let's say that you find yourself wanting to purchase a new investment or item for the business, but all of the excess cash is in your MI Company... Well, this is exactly why your structure was designed to be versatile. Your MI Company would loan money to your Operating Company or Asset Company (depending on the type and amount of asset).

 

Let's say that money was lent to the Asset Company. The Asset Company then purchased the asset. Then let's say that the Operating company was sued - what happens then? Well, there would be a loan in place from the MI Company, as well as a UCC1 or Deed of Trust that would give the MI company first right and standing (so the assets would already have an encumbrance by a company you own or control).

 

Switching Gears - Tax Reduction

 

When lending funds, the interest rate would flow to the MI company which would be taxed at a rate of 21%. Additionally, if you decided to activate the management function of the MI Company, then you can use the management fee to regulate the income that flows down to yo.

 

What Documentation:

 

In Phase Two of an Investment structure include:

 

     - Resolution Authorizing the Borrowing of Funds

     - Resolution Authorizing the Lending of Funds

     - Loan Agreement / with Signed Note

 

Monthly Activities:

 

     - Receive loan statement and invoices and create bills

     - Pay loan payment and other invoices / bills

     - Complete company books

     - Maintain minutes and resolutions

    

1st of the Month Activities:

 

 

Asset Company:       

 

1. Receive MI Company loan statement and create bill (if applicable)

2. Pay MI Company loan payment (pay to MI Company if there is a loan with Asset Company) 

 

MI Company:       

 

1. Send out loan statement from MI Company to Operating Company for monthly payment

2. Receive payment for loan (or accrue)

 
Investment Structure - Phase Two

Investment Structure - Phase Three (Management Company)

 

YOU DON'T NEED ALL OF THE MONEY

 

The largest factor of reaching Investment - Phase Three is that you no longer personally need all of the funds being generated. 

 

Basically, Investment - Phase Three is used once you reach the point where there are extra funds available in the business that you would like to use 1) to further business operations, or 2) to invest into other business scenarios. 

 

In this phase we introduce the management function to manage your Asset Companies. The  Management and Investment Company ("MI Company") provides services like management, sales management and goals, corporate compliance, accounting, and accountability, sales training, CEO and or CFO services, etc. 

 

This company is a "C" elected LLC. Since you have an "S" elected or pass-through Asset Company, we recommend a "C" elected LLC for complete asset protection and enhanced tax reduction capabilities.

 

This company only deals with companies that you own 51% or more, or where you are a partner and there is an indemnification agreement or clause documented. The reason for this is that we would like to isolate and limited the amount of companies that could have any "standing" to sue this business directly. This MI Company will accumulate all overflow or unneeded funds from all of your business scenarios, and in essence will become your main holding and investment company. If a company or individual could sue it directly, they would be able to get to the assets of the company (i.e.; funds accumulated in the company).

 

This MI Company can manage any of your companies from any of your business scenarios - so you need only one MI Company. The MI Company's purpose is to flow money into one key entity. Once the money is in this entity it can be lent to any companies or individuals that you would like - having full investment capabilities. 

 

Switching Gears - Tax Reduction

 

The beautiful thing about a "C" elected entity is that it has a flat tax rate of 21%. This means hypothetically that if your personal tax rate is 38% (federal and state combined), and the management company is a 21% taxpayer, you would save 17% on any money that flows from your Operating Company to your MI Company. 

 

If you selected "Save Money in Business" in the questionnaire, the program will actually outline the estimated amount that you will save by utilizing a management company given your income and the state that you live and operate in.

 

What State should I set up the Management Company?

 

At the end of the day, the goal is to have your management company set up in a state that has no corporate state income tax.

 

In the recommendations section, the report will compare having the management company in your home-state vs having the company in Nevada. 

 

What Documentation:

 

Phase Three of an Investment Structure includes:

 

     - Resolution Authorizing the Borrowing of Funds

     - Resolution Authorizing the Lending of Funds

     - Loan Agreement / with Signed Note

     - Resolution Authorizing Management Agreement

     - Management Agreement 

 

Monthly Activities:

 

     - Receive loan statement and invoices and create bills

     - Pay loan payment and other invoices / bills

     - Complete company books

     - Maintain minutes and resolutions

    

1st of the Month Activities:

 

 

Asset Company:       

 

1. Receive MI Company loan statement and create bill (if applicable)

2. Pay MI Company loan payment (pay to MI Company if there is a loan with Asset Company) 

3. Receive MI Company invoice and create bill (if applicable)

4. Pay MI Company bill (pay to MI Company if there is a management agreement with Asset Company) 

 

MI Company:       

 

1. Send out loan statement from MI Company to Operating Company for monthly payment

2. Receive payment for loan (or accrue)

3. Send out invoice from MI Company to Asset Company for monthly services (if there is a management agreement with Asset Co)

4. Receive payment for management services (or accrue)

 
Investment Structure - Phase Three