Understanding Your Risk in a Joint Venture (JV) Partnership

Joint Ventures in real estate investing are pretty common.

Most of these partnerships are created by placing a property into an LLC and having the partners all own a portion of that LLC. If anyone wants to sue you or your partner they will not be able to go after the other person—the LLC makes that protection possible.

In the video above, Scott talks about how charging order against the LLC can make things messy and painful.

The best strategy to deal with this type of situation is to have both yourself and other partners enter into the Joint Venture LLC through your personal LLCs. This takes minimal effort to establish, but can prevent the messy and costly potential of dealing with a charging order.

How To Structure Your Partnership To Protect Your Assets

Say you and your friend that start a company together to invest in real estate.

Now say your friend gets sued, and next thing you know there's a charging order against the LLC. If you don't know what a charging order is, start with this article and come back.

The Cliff Notes version is this: If there's any money distributed from the LLC, it has to be used to pay off the creditors to the extent that your friend has an interest in the LLC.

This means you can't get any money out of the investments you and your partner made—even though he (or she) is the one being sued!

This is not the case if you guys both enter into a Joint Venture LLC. This means using your personal LLCs to become members of the LLC used for the Joint Venture agreement.

This will allow you to distribute money that you can now control without having to pay off those creditors and hurt your friend or your business partner. It keeps everything nice, smooth and amiable.

Maintain Your LLC Corporate Structure to Avoid Lawsuits

Why file an LLC and manage a company if it's going to get invalidated? Can't a good litigation attorney just "pierce the corporate veil" of an LLC?

That advice is just wrong. LLCs are incredibly hard to pierce—if they are maintained correctly. The problem is that most business owners fail to do the things that are necessary to maintain the adequate corporate structure.

So what are the things that you need to keep in mind about how to structure real estate investment company?

First, you must maintain records and accounting of your company. How much money is coming in? What is the money that's being spent? You need to run everything through a bank account for your company to maintain the appearance of being a legitimate, separate entity from yourself.

You can not treat the money of the company as it were your own piggy bank. This means if you ever need to take money out, you must keep an accounting of it as a dividend from the company.

If you fail to follow these steps, a corporation can get pierced. If the corporation is pierced it provides no protection.

However, if you are diligent in maintaining adequate records of the company you will be protected.

What is a Partnership Return?

The LLC or Series LLC has the easiest tax returns for a single member. It's a "pass through entity," which means all of the income from the company can be reported on your personal income tax return.

You don't have to pay thousands of dollars to a CPA to file a business return. Great news!

This is also true for your spouse filing jointly. This can make tax preparation a lot easier.

Some states have specific tax rules regarding multi-member LLCs. For example, if you and a partner have an LLC, you may need to file a partnership return. This is a separate return for the business itself. You need a good CPA who knows about real estate investing to help you make sure you're doing it right.

Also note: In some cases, an LLC can be taxed as a corporation. In some cases, it makes sense to have your LLC taxed as an S Corps.

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How Does a Series LLC Work?

The Series LLC will work it's much like a parent/child structure. At the very top, you'll have your parent, the series LLC. The state assigns an EIN number and an official formation document for the state (Delaware, Nevada, Texas, etc).

Below the series LLC, you have the actual individual series. You'll have series A, series B, etc. Therefore, these are what I refer to as the "children."

A parent Series LLC can have as many children series it wants. Each one of these series is going to be treated as if it were its own LLC, for liability purposes. So, we hold an individual property or asset in each given series. In the case there is a lawsuit resulting in action against a house in series A, it won't affect the house in series B, C, etc.

Now you may have the need to be able to do joint ventures as your real estate business grows. These function just like LLCs. Due to that Series C could be a joint venture agreement with as many people as you would like. It'll have its own EIN number, tax return and its own operating agreement to conduct the business of that JV agreement.

With a series LLC, what it will allow you to do is to expand your business in a very professional way, protect your assets. So with all of these companies and all of these assets that you own individually, this will pass straight up through the series to have one tax return. Which means thousands of dollars a year in tax preparation savings for you.

My name is Scott Royal Smith, I'm an asset protection attorney focused on real estate asset protection and I'd like to help you.

Real Estate Basics: Asset Protection for Real Estate Investors

The basics of asset protection comes down to two parts.

One is we separate the investor's assets from the operations. All of the assets are held in one company. And this particular company doesn't interact with anybody, doesn't do anything, and has no contact with the outside world. You hold your real estate assets under anonymous names, inside of anonymous trusts and anonymous structures that nobody can even find out who owns them.

The operating company is a shell company. This company owns no real estate assets but it conducts all of the business. It's your face to the world, it's the one that we want people to sue if there's ever a dispute. In fact we want to structure our contracts that says if we have a problem you have to sue only this company. That protects us from all types of liability.

Whenever you're setting up a good asset protection strategy, remember: Keep assets on one hand, complete anonymity and separation, operations on the other.

Why Lawsuits Against a Series LLC Go Nowhere

If you’ve got money, people want it. Lawsuits are one of the easiest, yet still legal, ways for people to take your money. The more money you have the more likely it is someone will try to take it from you in a lawsuit. The same applies to your LLC if you have one.

The more money you have located inside of any individual LLC, the more attractive it's going to be for someone to sue you. Lawsuits against a series LLC, on the other hand, are a dead-end for money-hungry lawyers and litigants.

Lawsuits are all about how much money can I get out of somebody, and if there's a million dollars sitting inside of an LLC in equity or cash, well, that might be something that I really wanna go after.

That's why you should limit the equity of any individual LLC to $200,000.

Note: This is not the case if you're using a series LLC for real estate, because series LLCs allow you to compartmentalize those assets. So, you don't have the same worries there that we do inside of a traditional LLC.

However, I think that usually a few million dollars inside a series LLC makes it reasonable to be able to create a new entity just in case. Why not? Expenses that you're being able to incur by having to create a new series LLC,are far less than the amount of risk that you pose when you're risking millions of dollars in equity.

You can read about what the IRS thinks about an LLC here. But know this: The more money or equity you have inside your individual LLC, the more attractive it’s going to be for someone to sue you. And when they do, all of your assets will be caught under one legal net.

That’s why, compared to an LLC, a series LLC offers far more protection for you and your assets when it comes to lawsuits. Compartmentalizing assets means you can spread your assets out so in case someone does sue you, only one of your assets will be at risk.

Using a Series LLC for Real Estate Investment Protection

One of the best asset protection companies for real estate investors is the Series LLC. It's been around since 1996, originally started in Delaware but it spread through a number of states now. This allows you to form a Series LLC in their state and use the company in any state.

First, learn about the Series LLC vs LLC you probably know about. Then you'll start to understand that the Series LLC (unlike its more traditional counterpart) operates much like a parent-child type of relationship. You have one series LLC, this is the company named something like "Worldwide Investments LLC," for example. It will actually be filed in the state of Texas and that will have its certification of formation and all of those formal documents. Documents which certify that is a legitimate LLC inside of that state.

Series LLC Formation

Series LLC has special provisions inside of a formation as well as operating agreement which gives it the ability to have children, as many children as it would like in fact. Each child is known as its series. So we'll have series A. Later you can form series B, which is separate legally from the first. You can have unlimited series within a Series LLC. That's advantageous, because each series is treated individually for liability purposes, just as if it were its own limited liability company.

This means that if you have a property, a single property that's held by series A, which is what I'd recommend. We should be compartmentalizing our assets as investors. Because what we want is if there's a lawsuit regarding series A, it doesn't affect series B, C, D,etc. for every asset that we have. A incident works much like a single purpose LLC.

Series LLC Taxes

Series LLCs is also advantageous because they allow one EIN number that's filed underneath this company name. That allows us to streamline our tax preparation so that we're not having to do individual company filing.

Legal Considerations

Now, there's some apprehension in the industry regarding whether a series LLC would be recognized in a state that doesn't formally have a law both in Washington and created there. I personally believe that there's good reasons to think that due to the growing trends nationally these companies will be recognized if ever challenged. There's not a lot of case law on that fact though, but there's a lot of good reasons and precedent that we typically do recognize a company formed in Texas that would be operating, say, in Idaho. Idaho will recognize a Texas company.

These are LLCs. Just like any other LLC. Just with one small caveat, that it can create tiers. But, for the more conservative investor that has any apprehensions about that, I would recommend using a traditional single purpose, limited liability company for each property.

Costs Of Operating An LLC Vs. a Series LLC for Real Estate

You have to pay for the series LLC tax preparation for each one of those companies at the end of the year, you're gonna have to pay for the formation of those companies, operations, management, and registered agent of those companies which can be hundreds of dollars per year. And you're gonna have to pay what the overall complications and operations of those companies.

So you have to weigh your odds and how you feel about the Series LLC versus the single purpose limited liability company. My opinion is that the Series LLC is the way to go.

My name is Scott Royal Smith, with Royal legal solutions, I'm an asset protection attorney focused in real estate, and I'd like to help you. Set up a consultation to see how the Series LLC can streamline your asset protection protection today!

How to Protect Your IRA in Two Steps

People will tell you that your IRA is safe and they're wrong. Your IRA is only safe from a lawsuit against you and somebody coming after your IRA. If your IRA is invested in an asset class such as real estate where it can be sued, the IRA itself is exposed. Your IRA is exposed in the sense that it can be disqualified. If any of the transactions of the IRA are exposed.

There's two things that we do. The first thing that we do is, we can split up multiple IRA accounts. That way if any one type of investment is disqualified or has some type of issue that the IRS would look at? This limits your exposure, because it's only that one account that we have to worry about.

The second thing that you could do is set up a self-directed IRA with an LLC. I like to do it with a Series LLC. What that allows us to do is if you look at our videos regarding the Series LLC structure, we can take each different asset belonging to the IRA and put it into its own series.

That way if there's an issue with asset A, it doesn't affect asset B, C, D, etc. And this way, if you have one property that has a lawsuit against it, somebody can't take your entire IRA amount. They could only take a very limited amount of that structure. Be sure that your IRA is properly structured with asset protection, because it's not by default the safest way to do it.

My name is Scott Smith, I'm an asset protection attorney with real estate. I'm a real estate investor myself, and I want to help you. Click here to set up a consultation today!

LLCs Can Function as Pass-Through Entities

The LLC, or Series LLC, has the easiest tax returns for a single member. It's known as a pass through-entity. This means that all of the income from your company's able to be recorded on your personal income tax return. You don't have to pay thousands of dollars to CPA take people to file that business tax return that you would have to do otherwise.

This is also true if it's you and your spouse filing jointly for your income taxes. Some states they require multiple members, so this can be a huge leg up when it comes time for ease of use of tax preparation.

Let's take for example that you both have you and a partner inside of the LLC. You're going to have to file what's known as a partnership return. A partnership return is a separate return for the business itself. You're going to need somebody to help you repair that return, to which I suggest you hire a good CPA who is also a real estate investor to be able to help you prepare the return.

Also note that an LLC is able to be taxed as a corporation Some instances it can make sense in terms for your operating company to have that LLC taxed as an s corporation. So keep that in mind.

My name is Scott Smith. I'm an asset protection attorney, a real estate investor, and I want to help you. Click here to schedule a consultation today!

How to Protect Yourself in a Joint Venture Deal

Whenever you going into a joint venture deal, you'll almost always be inside an LLC where you'll be a partial owner of that company.

A lot of times you're protected because the property's going to be owned by a limited liability company (LLC). So if anybody were to sue you or your partner, they can't get to the ultimate asset.

Imagine a scenario in which you and your friend form a company together to buy a house. But your friend gets sued, and therefore there's now a charging order against the LLC. If you don't know what a charging order is, look at our other video regarding that.

Essentially, a charging order dictates that if there's any money distributed from the LLC it has to be used to pay off the creditors to the extent that your friend has an interest in the LLC.

Now your friend has to pay back those creditors before you can get any money out of your investment

This is not the case if you guys both enter into it with your personal LLCs that you used as investment vehicles. Use your own LLC to become members of the LLC used for the JV agreement. This will allow you to distribute money that you can now control without having to pay off those creditors.

How Real Estate Investors Lose Money

Real estate investors lose money in two ways. The first is because the actually made a bad investment. The second is because somebody took it from them. And they can do that easily through a lawsuit.

Lawsuits are basically just legalized stealing. So one of the key things that we have to do to guard against Half of the way that we would lose our money in real estate investing through litigations, let's protect ourselves from that. That's what an asset protection strategy is.

How Title Insurance Works

Anytime you transfer property, you must consider the title insurance implications. Title Insurance will generally being validated upon the transfer of the property. However, title insurance isn't invalidated. If you transfer the property to a wholly owned LLC, that is an LLC that is completely owned by you, the person that also own the property, will also will invalidate it.

If you add your spouse to title for example, that'd be a transfer. But in that circumstance they're not going to invalidate. You also can transfer the property to an inter vivos trust where you are in the settler of that trust. This is the type of strategy that we'll be using with inside of our anonymity land trust and we start transferring properly.

My name is Scott Smith. I'm an asset protection attorney. I'm a real estate investor and I want to help. Click here to set up a consultation today!

Why Asset Protection is a Must

If you're a real estate investor and you own assets in your personal name, you need to pick up the clue phone. It's ringing.

You're in the most litigated industry and the most litigious country in the world. Do you really want to own assets in a way that allows anybody with a good lawyer to attack and plunder?

You're investing thousands and thousands of dollars into acquiring a property, right? It might be a smart asset protection tactic to spend a little bit of money and set yourself up to be protected.

Listen: Rich people don't "own" assets and there's a good reason for that. When you own assets, people can see your ownership and get to them.

You need a network of LLCs and trusts to protect your assets. Hide them from people looking to sue you to get after your hard-earned dollars.

When they look to launch a lawsuit against you, you need to make them understand that they're going to get nothing, Because it looks like on paper that you own nothing. You need to be legally judgment proof that even if somebody were to successfully sue you, it can't actually hurt you.

Advantages of Having an LLC Over Insurance For Asset Protection

Insurance will not protect you from most lawsuits that will happen regarding the transaction of your buying and selling of real estate. Every time that you're entering into a contract. Every time you actually sell a piece of property, every time you lease to a new tenant. These are all things insurance doesn't cover. Because of that, the only way for you to save your hard earned dollars is an asset protection strategy. That is the proper LLC and company structure.

Set up an asset protection consultation today!

Real Estate Investors Can't Just Rely On Insurance

[00:08] Insurance companies are basically a criminal business. Their whole business model is built around collecting premiums from you and denying coverage whenever it is that you asked for something that they should otherwise cup, and the reality of the situation is if you have a big claim, you end up having to sue the insurance company just to get them to pay out. I don't think as an investor, that is something I want to rely on when it comes to the big ticket items. Sure, they're going to cover the $5,000 slip and fall case that happened on your front porch because it was a little icy outside, but what they're not going to cover as grandma falling to this staircase, breaking your hip and now being permanently disabled for the rest of her life. Well, what then that case where they're going to say this, you should have known about the staircase. This is a case of gross negligence that's outside of your policy limits. You can sue us and spend thousands of dollars against our millions of dollars hoping that we'll actually end up paying anything out too.

[01:15] Okay.

[01:16] What you need to protect yourself to protect your assets as a proper asset protection strategy, incorporating and not a truss and LLCs to keep people from coming after your hard earned dollars. My name is Scott Royal Smith. I'm an asset protection attorney. I'm an a real estate investor myself and I'd like to help you

[01:43] if you thought this content was good, you have to go see the bigger pockets podcast that I did. It was the top 10 things every real estate investor has to know about asset protection, and you can go listen to it right here.

How to Protect Real Estate Equity

If you have equity in your property, you're at risk. The reality of the situation is that equity is what people are looking for whenever they wanna sue you. There's a couple of different ways that you can protect yourself against this. One is that you could actually take out a true mortgage on the property, going through a bank and going through that entire process and physically pulling the money out. Now that has its own drawbacks, right. I mean, you have closing costs as well as you're having to pay interest on that money. Another option would be to actually disguise the equity. It doesn't actually protect you if there's a lawsuit, but it'll make it look like the property doesn't have any equity attached to it. You do that with a home equity line of credit. A third option is to establish your own mortgage company. And by establishing your own mortgage company, you can issue a mortgage basically to yourself In a way. Through the company structure, this allows you to be able to have a no-cost way of establishing mortgage, besides the recording fees, and attorney's fees in setting that up. But that's always gonna be lower than the closing cost of something you would do at the bank. And you never actually have to do much with it after that. Because it's a true mortgage that's recorded on the property, if there's a lawsuit That mortgage actually has to get paid out before a creditor could collect. My name is Scott Smith, I'm an asset protection attorney with real estate, I'm a real estate investor myself and I wanna help you.

Should You Worry About the Due on Sale Clause?

Despite what you might read on the internet, don't worry about the due-on-sale clause. The fact is is, since before 1960, we haven't seen any bank foreclose based upon a violation of the due-on-sale clause while the note's performing. The fact is is that banks are in the business of making loans and collecting mortgage payments. The due-on-sale clause would allow them to foreclose on your property by transferring the asset. But why would they do that? This could only hurt their interest. Like I've seen it a couple of times, where banks have foreclosed based upon it. But those were always in situations where the mortgage wasn't getting paid, and that was gonna get foreclosed on anyway. So in that sense, don't worry about it. Protect yourself with your proper asset protections strategy. My name is Scott Smith. I'm an asset protection real estate attorney, out of Austin, Texas, and I wanna help you.

Anonymous Trusts & Asset Protection

Rich people employ asset protection specialists to make sure that their wealth is preserved from any particular lawsuit.

How do we protect the assets and keep people from finding out about them? We do this is by using anonymous trust.

You already know about the LLC and the protections that an LLC is going to give you in terms of anybody trying to sue you and get you your assets. What you might not know is that as a matter of public record and traditional filing that you would do with Legalzoom or another legal website or your average CPA or attorney is that now everybody knows what you're LLC is? Well, what we use is a trust.

You can use a trust to be able to own the LLC well trust or private documents so nobody would be able to find out who actually owns that trust, where the beneficiary of the trust assets, you can own the LLC anonymous. You also know that the ultimate goal of actually having this LLC is to hold the asset. Your ultimate goal for this piece of property.

This piece of property has a deed, and on that deed it says who owns it. Well, if that's your LLC and people can connect it to your company's structure, if it's you, now they know that you own it. That's your worst case scenario.

But you might have not known that a trust itself can actually be the title holder to the property. This keeps anybody from being able to connect your property to your company. So in effect, you have complete anonymity. Nobody can find out who owns your company and nobody can find out who owns your property.

How the 'Three Company' Structure Protects Real Estate Investors

A typical real estate investor should be looking at a three-company structure.

The first of these companies should be a buy and hold LLC. The buy and hold LLC is going to be for long-term rentals. It's going to hold a number of different properties that you will be holding for longer than a year.

The next company that you're gonna have is your fix and flip LLC. Those are properties that you're gonna be holding for less than a year.

The reason that we need two of these is because they have different tax treatment. Your buy and hold is going to be a long-term capital gains taxation, your fix and flip is gonna be short-term capital gains.

Your third company will be your operating company (corporation or operating LLC). Typically we use corporations for some instances and LLCs for other instances. The corporation shields you from any personal liability in conducting your business. If you run your business personally, you're collecting the rent, you're negotiating with contractors, entering the contract, etc. This all can mean a lawsuit against you personally.

Even if you were smart and protected all of your assets inside of the LLC, what will happen is that a judgement against you gets recorded onto your credit report, impacting your credit score. The lower the credit score you have, your less ability to have financing. And that means real dollars out of your pocket.

Title Holding Trust (AKA Land Trust), Explained

Land trust or title holding trusts are used for anonymity, but they don't actually provide protection from a lawsuit.

An LLC is required to provide that protection.

A trust is made of three parts. You have a grantor of the trust, a trustee, and a beneficiary. A trustee is used to actually control the property of the trust and manage the trust itself. The beneficiary is the person entitled to all the benefits of the trust, all the money flowing from the trust.

Now in some circumstances you'll be required to be able to disclose who the trustee of a trust is. In these cases, you can use a nominee trustee. This is a person listed on the trust document who has defined powers. These powers might include filing a tax return on behalf of the trust with the comptroller or the tax agency for the state or perhaps just for filing purposes of the deed.

The nominee trustee can be limited to have no other powers inside of the trust besides those specified.

Anybody that's looking to actually alienate a property, sell it or dispose of the trust asset will want to look at the trust agreement before they know that they're going to buy an asset from your trust. In that agreement they'll see that the nominee trustee doesn't have those powers.

So you don't have to worry about somebody running away with your property and the person that will have those powers will be laid out in that document. And that person can be you.

Why All IRAs Require a Custodian

[00:08] Not all LLCs are taxed. The same single member LLCs aren't going to always have pass through tax cheat. This is ideal as well as married couples owning and I'll see together in a community property state. However, married couples in a non community property state will have to file a partnership tax return for their LLC. They're both [inaudible].

[00:37] Hey, thanks for watching this video. If you want more high quality content just like this, you can find it here on our youtube channel are going to our website, royal legal solutions.com we have a ton of free content from our blogs or videos, the podcasts that I had been featured on. Whatever question you have, we're going to have it there for you. Are

[00:54] you.

What Real Estate Investors Always Forget ... And How It Costs Them 💸

As a real estate investor, you have to understand that lawsuits are a business. If anybody is looking to sue you, they’re looking to get your money.

A proper asset protection strategy keeps people from finding out what you own. If they follow through with a lawsuit, it limits what they can get from you.

More importantly, a great asset protection strategy exhausts their will and their resources to fight.

This keeps people from continuing with the lawsuit.

It gets them to settle early.

It gets them (in most cases) to stop the lawsuit before it even starts.

Lawsuits Targeting Real Estate Investors Are Big Business

Because lawsuits are a business, the attorneys who drive them have one job: to figure out how to get money out of the real estate investors they are suing.

An asset protection strategy dismantles their approach. It protects the assets from being seized by in a judgment. This person doesn’t believe that they are getting anything out of their investment in a lawsuit.

Lawsuits are only paid for in two ways: Either you pay an attorney to sue or the attorney takes it on contingency.

If someone can't find any assets on paper have no assets on paper, how much money should you be willing to risk for a judgment?

Moreover, there’s no attorney who is worth his salt that is ever going to take a case like that on a contingency. Contingency is free for the client. The attorney risks everything.

In addition, attorneys only accept cases when they are confident they can win and collect.

How Do I Protect My Real Estate Investments?

So, when you ask yourself, "how do I protect myself from a lawsuit?", what you should really be asking yourself is, "How can I make it seem as if I don’t own anything?"

You get a proper asset protection strategy. Start with our investor quiz and we'll take it from there. We'll make you look like you qualify for food stamps. Remember ... without an asset to seize, a judgement is worthless. How much money will someone risk for a judgement which is merely a piece of paper?