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, many 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:

  1. LLC "S" Election

If you have one of the following enter Phase 1:

  • You own valuable Business Assets, and or Investments


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 the following situation enter Phase 2:

  • You will be investing in multiple assets,


  • 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


  • use it as a Lending Company for Asset protection

  1. LLC "S" Election

  2. LLC "C" Election

If you have the following situation enter Phase 3:

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

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


  • 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 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 you & your assets is to put your assets into a business entity. Normally, the best entity to hold assets is in a Limited Liability Company - an "Asset Company".


  • LLC to Protect You From the Asset (Dangerous Asset):

    • When you put an asset into an LLC the entity acts like a shield that will protect you from the asset (if the asset is a dangerous asset) and brings a law suit to you. We describe dangerous assets in more depth below.

  • LLC to Protect the Asset From You (Liability You Cause):

    • Additionally, if you meet the right requirements, the LLC could protect the assets from your liabilities you cause. 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 LLC would protect the business 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 the LLC from you (and by extension seize ownership of the asset from you).


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.


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.


Splitting up Dangerous Assets:


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. 


Real Estate TIP: How Many Properties to an LLC (3 Factors):

Factor 1: Your Comfort Level

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. If you are only comfortable with $200,000 worth of equity in one LLC then you may consider putting 2 properties in one entity and 1 property in a separate LLC. This way you would have an LLC with $200k worth of equity and another LLC with $100k worth of equity.


Factor 2: Property Risk Assessment

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. So, depending on your comfort level, you may want to separate your high risk properties  from your lower risk properties.

Factor 3: Future Plans

The amount of LLC's that you potentially consider using could be influence by your overall strategy. For example, if you are going to hold properties for a long time for cash flow or equity purposes, then you may want to consider how much equity you will have per property 10, 15, or 30 years from now. If you are going to have 5 times your comfort level of equity in one LLC ten years from now, you may want to consider using more LLC's then you would have originally considered.




Set up separate "S" elected LLC's for safe assets and dangerous assets (if it is not directly owned by another LLC).




The best way to get funds into your Investment LLC's in Phase One is to personally capitalize the Asset Company, and then to have the Asset Company purchase the assets, or if it is a financed asset like real estate - have the asset financed then contributed to the LLC. 


Why "S" Elected?


"S" elected means that the profit or loss flows down to you as an individual (so its taxable to you personally). While this might not sound ideal, you will be able to save on self employment taxes which could be significant. To get an estimated amount that you could potentially save take our quick quiz.


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 corporate 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 documentation that you will need to stay  needed includes:


     - Resolution Authorizing the Personal Guarantee 

     - Loan Agreement / with Signed Note


Monthly Activities:

     - Make sure that you pay the expenses out of the LLC business account

     - Receive invoices and create bills for tenants 

     - Complete company books

     - Maintain minutes and resolutions


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 capitalizing Asset Company with funds to purchase assets or transferring the properties to capitalize, you would set up a "C" elected LLC to act as your personal management & investment company. You would capitalize 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 Asset 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)




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 from and to the MI LLC to the Asset(s) LLC's

     - Pay loan payment and other invoices / bills from and to the MI LLC to the Asset(s) LLC's

     - Complete company books for all LLC's

     - 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

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