Professional Advice, It’s Worth the Price
The book, “Rich Dad, Poor Dad” by Robert Kiyosaki was first published in 1997, the year I graduated from college. I am not a big book reader and I forget who recommended the book to me. However, it instantly caught my attention and I immersed myself into every page and read it rather fast. I then read his others books or listened to them (on cassette tapes). If you have any interest in starting a business or how to get out of the “rat race”, I highly recommend his books.
One of the tips Kiyosaki writes about is that his companies were formed in Delaware. He explained it was easy to do and the laws and taxes were favorable for businesses in that state. Another point he makes in that book and others he has written is to have a good team of professionals, especially attorneys and accountants. He states he is happy to pay those professionals for their time because their expertise is valuable. That second point I heard but did not follow at first. Why? I did not have the money to pay expensive attorneys and accountants. That decision ending up costing more money, heartache, and time in the long run.
One of the benefits of setting up an LLC (Limited Liability Company) is if the LLC gets sued your personal assets are protected. When I first started real estate investing, I did not have any personal assets besides a Chevy S-10 pickup truck worth about $2500. In 2002, I first setup my LLC based in Delaware like Kiyosaki did although the purpose of my business was to buy and sell properties in Tennessee. I did not hire an attorney or consult an accountant.
Tax season came around in 2003 and I was referred to a CPA from another real estate investor. When I told him, I had an LLC formed in Delaware he said, “you don’t want to do that, you will be taxed as a foreign entity from the state of Tennessee.” So, I paid $250 to dissolve the LLC in Delaware and formed in Tennessee. Again, I filled out the paperwork myself.
Fast forward to 2008, I had been married since 2005 and was starting to grow my business. My wife’s friend was a tax attorney and I met with him and a colleague of his who happen to be one of most highly regarded tax attorneys in Nashville. As they looked over my paperwork they asked about my operating agreement. I did not have one. They asked, “Why are you taxed as a corporation?” I did not know. I just checked a box that made sense to me when filing out the paperwork with the state back in 2003. As my face turned red and my heart fell into my stomach, the attorneys then went into a long explanation on why that was a costly decision and recommended to dissolve that LLC by year end and start a new one. As I have learned, attorneys will typically recommend talking to a CPA regarding a big change that will affect your taxes, and they should. I then had to pay my CPA for a couple of conference calls and meetings to hash out the details.
To do this involved getting appraisals on the properties held in the current LLC. That was over $1000. I would then have a tax payment of about $18,000 to move them into the new LLC. This was going to be less expensive than not moving them over time.
This was a painful and costly lesson. I hope you do not make the same mistakes. Books and seminars about real estate investing and business have been immensely helpful in my career. We can read every book written about a topic and still not hear the advice or not follow it. Taking advice from professionals who are experts in their field is well-worth the rate they charge.