Garrett Sutton is an attorney and the founder of Corporate Direct, which helps entrepreneurs and investors protect their assets, maintain privacy, and reach their financial goals. He’s also a best-selling author and one of Robert Kiyosaki's Rich Dad Advisors.
In this episode, Garrett discusses LLCs — why real estate investors need them, how and why they vary from state to state, and the benefits of having your LLC taxed as an S-corp. He also compares CRE investing to a new market into which he’s delving: movies.
Garrett Sutton | Real Estate Background
- Attorney and founder of Corporate Direct, which helps entrepreneurs and investors protect their assets, maintain privacy, and reach their financial goals. Best-selling author and one of Robert Kiyosaki's Rich Dad Advisors.
- Previous episode: JF964: Do You Know About these LEGAL LOOPHOLES of Real Estate?
- Based in: Reno, NV
- Say hi to him at:
- Best Ever Book: Rich Dad Poor Dad, by Robert Kiyosaki; Veil Not Fail, by Garrett Sutton, Esq.
- Greatest Lesson: Start early, learn from your mistakes, and keep going. Don’t let the fear of making a mistake keep you from moving forward.
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TRANSCRIPT
Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed, and I'm here with Garrett Sutton. Garrett is joining us from Reno, Nevada. He is an attorney and founder of Corporate Direct, which helps entrepreneurs and investors protect their assets, maintain privacy and reach their financial goals. He is a best-selling author of a handful of Rich Dad books, including one of the first ones I read, called "Start your own corporation", and he's one of Robert Kiyosaki's Rich Dad advisors. Garrett, can you tell us a little bit more about your background and what you're currently focused on?
Garrett Sutton: Sure. Well, thanks, Slocomb for having me on. I'm an attorney here in Reno. I went to school in the Bay Area, and like so many other Californians, although I was a bit earlier, moved up to Nevada in 1989, and took the Nevada bar exam after the California bar exam, and have practiced law here in Reno since 1989. Nevada, as you know, is a great place to set up a corporation or an LLC. We also like Wyoming, and we just bought an office in Casper, Wyoming for all our Wyoming clients... And it's been just great working with Robert Kiyosaki and the team, talking about financial education, not only in the US, Slocomb, but around the world. There's this great thirst for financial education all over the planet, and it's been just great traveling around and talking to people about these important issues.
Slocomb Reed: I'll be among the first to say that I know the Rich Dad company is doing great work in that regard. I have the most basic new real estate investor story nowadays as a millennial; I eventually and finally got a hold of Rich Dad, Poor Dad and I set my pants on fire, because I had never been taught to think that way, or to think about the world that way, and think about money, business, how the government taxes operate... And you know, I went straight from Rich Dad Poor Dad to Cashflow Quadrant, Rich Dad's Guide to Investing, some of Ken Mcelroy's books, one of your books... So I get it, I'm a fan.
Garrett Sutton: Good. Well, that's the whole idea, is to provide this information that they don't provide in school. You have to get this information on your own. You're not going to get a course on Rich Dad, Poor Dad, or how to invest in real estate, or how to protect yourself with LLCs in the school system. Robert Kiyosaki tried for years to get this information into the Arizona public schools, and there was just no appetite for it. So you need to get it on your own, and that's the mission of the Rich Dad company, and that's why I've been helping 1000s of people over the last 20 years set up their entities; it's not expensive, we make it so you understand it; it's not a mystery, and it's just something you have to do when you start investing.
If you invest in your individual name, you own a duplex in your individual name, a tenant can sue and not only get the equity in the duplex, but because you own it in your individual name, they can get everything else you own. So right at the start, you need to think about setting up these LLCs to protect yourself, because you've worked hard to raise the money to buy that duplex. We don't want to lose it with one tenant suing you.
Slocomb Reed: That makes a lot of sense. I have a couple of questions here for you specific to that entity formation type things... Questions that I believe I've heard or read answers to in at least one of your books already, but I want to ask as a refresher for myself, and also on behalf of our listeners. You said Nevada and Wyoming are both great places to form your LLC. Why is that? I'm in Cincinnati, Ohio; why not just form one here in Ohio?
Garrett Sutton: It's really interesting, Slocomb... It dates back to the American Revolution; most countries have a national corporate law. And during the revolution, each state, because we fought off the British East India Company, which was kind of like Walmart and Amazon rolled into one, it was a giant corporation that was in part behind the revolution on the British side, each state wanted to have their own corporate law after the revolution. And that's how it evolved in our country.
In other countries, it's just one national corporate law. Well, when you have 50 states having their own corporate law, some states compete to be the best, and they are able to generate fees for the state by charging an annual fee to have a corporation chartered in their state. So the three most competitive states are Nevada, Wyoming and Delaware. We like Wyoming the best, because the annual fee is only $62 a year. They don't list your name on the state website, so you have some privacy there... But the other two states are fine as well. They're just going to be a little bit more expensive. But we like those three states.
If you have a property in Ohio, Slocomb, you could use an Ohio LLC to be on title to the duplex in Cincinnati. If you get sued, Ohio law applies. If you get sued by a tenant, suing on the inside attack, they have a claim against the LLC they rent it from. Wyoming comes into play because we would have the Ohio LLC owned by a Wyoming LLC, and there you have excellent asset protection. So on the outside attack, where you get sued in a car wreck, it has nothing to do with the Ohio real estate; it's just a personal attack that someone is trying to get at your other assets. They would have to fight through Wyoming to get at the Ohio property. And Wyoming is very difficult to get through; they have an exclusive remedy called the charging order, which is essentially a lien on distributions, meaning the attorney, who's on a contingency fee - remember, in a car wreck case, the attorney gets a percentage of what they collect. They'll get 35% to 40% of what they collect. They know how to get after the insurance money, but they're not good at getting through Wyoming LLCs, because they have to hire an attorney in Wyoming in many cases, they have to pursue a claim in Wyoming, and it's just not a good use of their time, especially to get a charging order, which is just a lien on distributions, meaning if the Wyoming LLC transfers money to you, it's supposed to go to the car wreck victim. But the attorney has to monitor that. It's just not a good use of their time.
So we like everybody to have insurance; you're going to have hopefully an umbrella policy, whereby your home and your autos are insured with this extra policy of coverage. An extra million dollars of coverage is only $400 a year. So that's really good insurance; the attorneys know how to get at the insurance, and then they're typically going to leave you alone on the Wyoming LLC... Because again, Slocomb, it's not a good use of their time trying to pursue a charging order in that regard.
Slocomb Reed: That makes a lot of sense. I know my next question gets into much more tax and tax law than anything, but I have a property management company and a general contracting company here, primarily for work within my own portfolio, but some of them are also doing some work third party... They're currently LLCs, and I have people telling me that they really should be S-corps. Everyone has their own elevator pitch as to why, the people who are saying this. Can I get your elevator pitch? Do I need to be an S-corp?
Garrett Sutton: Well, I like, for business operations, the LLC to be taxed as an S-corp. An LLC has great flexibility with taxation; it can be -- if you're one owner, it can be a disregarded entity, meaning everything flows through to you personally. It can be a partnership, where two people are owners, and you are taxed based on K-1s. It can be taxed as a C-Corp or an S-corp. Now, we like the S-corp, because for business operating entities, typically that money is subject to payroll taxes, and we want to minimize those payroll taxes. Those are 15.3%, because you're the owner and the employee.
So with the S-corp, you can have an LLC taxed as an S-corp. And with the S-corp, you pay a reasonable salary, you pay the darn payroll taxes on that, and then everything else flows through without the payroll taxes. So I wouldn't switch to an actual S-corp entity; I would leave your LLC as it is, and just have your CPA get it taxed as an S-corp. So we like the asset protection of the LLC; you don't have that with the S-corp like you do with the LLC. But we also like the taxation of the S-corp, where you can minimize the payroll taxes, that 15.3% that most of us are never going to see... So we can combine them - asset protection of an LLC, payroll tax minimization with an S-corp.
Slocomb Reed: Garrett, for the sake of this short-form podcast, I think I follow, and if I have more questions, I can reach out to you, and I'm gonna ask you for the best way to reach out to you soon. I do want to ask how you invest as a Rich Dad advisor, because I know you have exposure to a lot of different asset classes: real estate, traditional asset classes, and others. Where is it that you're investing right now?
Garrett Sutton: Well, I will answer that, but as to your point, I know this is kind of difficult, this is a lot of information, and again, it's not taught in school. So we have a newsletter at corporatedirect.com. You can subscribe to that. And we also have articles about these very issues at corporatedirect.com. You can also call and get a free 15-minute consultation with an incorporating specialist to talk about your situation, and see if we can help.
Now, I have invested in real estate in the past, Slocomb, and I really enjoy real estate investing. It's been good for me. Here in Reno and other areas, the prices of real estate have just gotten really too high for me, so now I'm investing, of all things, in movies. There are quite a number of tax deductions that you can take advantage of if you invest in movies; section 181 of the IRS tax code.
So some friends and I are working on three documentaries right now. We're going to do a feature length movie in Kentucky in May... And that's an investment. There's a great need for content. It's kind of like owning a duplex. There's always a need for content, and you get some significant tax advantages with film production. So that's where I am now.
Break: [00:12:39.17]
Slocomb Reed: Garrett, with everything happening in the economy and in real estate markets, thinking of market geographically, but also thinking about the variety of asset classes available within commercial real estate, there is a demand for conversation about the market of the moment. We're recording in early February 2023. With what is and has been happening, inflation, interest rates, the Federal Reserve, global politics... I'm not going to ask you to look into your crystal ball, but based on what's going on, is it the market of the moment that is pushing you to movies? Or is it more so tax deductions that would be available whenever you did that investing? Or is there an investing activity that you're taking right now specific to the market and economic climate that we're experiencing?
Garrett Sutton: Well, for the movies, it's really three reasons. The first is I've had a lifelong interest in it, and my son has just passed the Wyoming bar exam, and he's going to take over the practice, so I'm going to be doing other activities, including the movie-making.
Slocomb Reed: Nice.
Garrett Sutton: Secondly, the tax deductions are significant. Like with real estate, the tax code is a series of incentives, and the incentive for me making movies is there right now. And thirdly - yes, the market of the moment, for me, I just don't see how to really make a go of some of these investments in real estate that I did 10 years ago. So that's why I'm doing movies, which again, is also an area of great interest for me.
But I would have to say, if the market were better for real estate investing, I might be putting my money there. And at least for us in this area, it's not a great market right now. I think the prices will come down further, but they're not down enough quite yet. And maybe they don't come down. Again, I don't have a great crystal ball. I don't know what will happen. But right now, I'm not investing in real estate.
Slocomb Reed: You mentioned the demand for content, and you're making documentaries, and you're gonna go full-length film later this year... I wonder if there's a comparison that can be drawn here. I think everyone who's been involved in real estate investing in the last few years, or the last 10 years, would say that it was a lot easier to do 10 years ago; we're talking about early 2013... That's, for the record, when I first read Rich Dad, Poor Dad. Real estate-wise, everything was on sale 10 years ago. And the conversations that I was having as an aspiring investor, with more seasoned investors, was things like they don't touch anything beneath a 20% cash-on-cash return. And that's without sale. That's an operating cash on cash return, which is an absurd thing for anyone to say in 2023 anywhere, with any real estate asset class, unless they're operating a business within that real estate.
I'm wondering if the point of comparison here is that within movies - I'm going to ask you to correct me where I'm wrong, Garrett - there's such a greater demand for it because the way that we consume that content has changed so much in the last few years, that we've gone to several subscription services effectively all vying for their own independent or private content, that they can put behind their paywall to get people to join or stay on their platforms, and that's creating this push for more content, which is creating more investment opportunity within that asset class? Am I completely off-base, or do Hulu and Netflix and Disney+ and Peacock have a lot to do with your decision to invest in movies right now?
Garrett Sutton: They do. Netflix and some of the others have overpaid for content. So you're seeing them pulling back on the amount of money they're putting forward for some of the content. We're going to be specializing in lower-budget movies, and we may be doing our own streaming platform as well. But the demand for content, as you mentioned, Slocomb, because of the change in the way people are viewing movies, on their smartphone, at home, binge watching, the market has changed and has created a huge demand for content. The tax advantages are still there, federally and state. In Kentucky and Georgia you can get 30% of your budget back through these state grants. So a combination of federal tax advantages, and state tax advantages makes movie-making really quite - I wouldn't say lucrative, because it's always dependent on the content that you create... But the downside risk is minimized by these significant tax advantages that you have on the state and federal level.
Slocomb Reed: Before we move on to the last segment of the show, I would like to point out that the idea of Netflix being big money overpaying for major aspects, and then deciding recently to pull back on what they were willing to offer in that asset class - that's going to sound very familiar to a lot of apartment investors, especially in syndication-size apartments: big money overpaying, and then deciding to draw back on what is willing to pay, cost per unit... And trying to increase cap rates in late 2022 and 2023. So that sounded very familiar, that there's a lot of institutional money out there acting like Netflix and the acquisition of its assets.
Garrett Sutton: Well, films and real estate are both markets, and they go up and they go down.
Slocomb Reed: That's a very interesting point. That's not a point of comparison I've ever made before, between film and real estate. Gary, are you ready for the Best Ever lightning round?
Garrett Sutton: I am.
Slocomb Reed: What is the best ever book you've recently read?
Garrett Sutton: Well, I always say Rich Dad, Poor Dad. I read it 20 years ago. But for someone who hasn't read that book, I would suggest picking it up, because - like for you, Slocomb, it's an eye-opener. And over the last 20 years, talking to Robert, people that have read Robert's book, it has been life-changing for many people. So I heartily recommend Rich Dad, Poor Dad.
Slocomb Reed: Thank you. That's my go-to Best Ever book. For recently read though, let's imagine someone who read Rich Dad Poor Dad 10 years ago and has read 100 other business and personal growth books in the meantime... Is there something you've read recently that you would recommend?
Garrett Sutton: Well, actually, there's something I wrote recently that I would recommend... Veil, Not Fail. This is about how the corporate veil can be pierced, and you can lose your protection. And it's true with LLCs as well. So this book just came out in December. What a great month to sell a business book... It talks about how you can protect your corporate veil, because in 50% of all cases where someone has a judgment against the corporation, the corporation has no money, and they want to pierce the veil and get at the individual shareholders. Half the time that works. So too many people aren't following the corporate formalities for protecting the corporate or the LLC veil. So I would recommend that book.
Slocomb Reed: What is your best ever way to give back?
Garrett Sutton: A couple of ways. I'm on the boards of several charitable organizations, so I give back that way, my time and money and energy... Then we try and keep things affordable here at Corporate Direct. So when you're starting up an entity, too many people are charging $5,000 for an LLC. We don't do that. We provide the complete package at a very affordable price, we let you know right up front what everything costs in the first year, and then the price drops down, and what it costs in the second and future years. So I think we're giving back in that regard as well.
Slocomb Reed: Garrett, within your own investing, real estate and otherwise, what is the biggest mistake you've made, and the best ever lesson that resulted from it?
Garrett Sutton: Well, like many others, I think the biggest mistake early on was having the wrong partner. It's like a marriage, and you better be careful who you bring on as a partner in your real estate or business investing. So over the years, I had some bad partners. And you just need to learn from that experience. I'm not saying never go into business because you're worried about a bad partner. You need to make your mistakes early, and learn from them. And maybe you'll have that bad partner, and you will learn from it. But I just think that early on, I just was not lucky when it came to partners and partnerships, and I've taken those lessons from then on, and been very cautious about who I do business with.
Slocomb Reed: That makes a lot of sense. Garrett, on that note, what is your best ever advice?
Garrett Sutton: Oh, I think the best ever advice is to get started. People have the paralysis of analysis; they never get in the game. They'll do the reading, they'll go to the lectures, they'll understand what the issues are, but they will never pull the trigger. And just know, on that first investment there's a good chance you're going to make a mistake. That's okay. You're going to learn from it. So if you're interested in investing in real estate, start whenever you can, learn from your mistakes, and keep going. It's not unusual to make a mistake. I have 1000s of people before you have, so don't let the fear of a mistake stop you from moving forward.
Slocomb Reed: Last question... Tell us again where people can get in touch with you.
Garrett Sutton: Well, our main website is corporatedirect.com. We have articles there, information, you can set up a free 15-minute consultation with an incorporating specialist, and talk about how we can help you and what your situation is. So that is the best place, Slocomb - CorporateDirect.com.
Slocomb Reed: That link is in the show notes. Garrett, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this conversation, please do subscribe to our show, leave us a five star review and share this episode with a friend you know we can add value to through the episode today. Thank you, and have a best ever day.
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