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Experts Unleashed

Bulletproof Business Structure: EU 109 with Ross Brunson

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Tags: entity, structure, business, Success, entrepreneurs

Today I have a special treat for you.

I recently sat down with Ross Brunson, the creator of Business Structuring Secrets to talk about his bulletproof business structure.

In 1990, Ross began working in accounting and tax returns. Over time, people started coming to him for help with starting their businesses. Being in this field allowed him to learn the ins and outs of business entities, and where the strong and weak points are in each particular business. In this episode, Ross shares some golden nuggets about what he has learned.

For all you entrepreneurs out there, as exciting as it is to start your business, it’s essential to set yourself up for success. Otherwise, you might be exposed to legal issues and pay more in taxes.

The structuring secrets Ross shares with us are essential. It’s the kind of information that if someone hadn’t known it from the start of their entrepreneurial journey, they are going to wish they had listened to this episode.

This information is detail-rich, so my intention for this episode was to condense it all in a digestible way so you can benefit from it.

If you’re an entrepreneur that is just starting their journey, or even if you’ve already started and want to learn more about protecting and structuring your business better, this episode is for you.

Find out more at businessstructuringsecrets.com

You'll Discover:

  • Important factors that most entrepreneurs don’t consider when they set up their business. [5:20]

  • The origin of the Business Structure System. [19:25]

  • Operating with 2 entities: How does it work? [28:00]

  • Adding a third entity. [46:00]

  • How do you determine the right structure for your clients? [55:20]

… and much more!

Watch Interview

Episode Transcript

EU 109 audio

[00:00:00] Ross Brunson:
The LLC is very strong when it comes to protecting you personally, your personal assets from somebody that’s trying to get to you because of the fact that you are, you know doing business with them. But now, as I mentioned earlier, the downside of the limited partnership is it doesn’t give us any special tax benefits, any income that we generate through.

LLC is going to be subject to our self-employment tax, our social security, and our Medicare tax and our income tax, so that money that comes to us is double taxed. So if we do nothing, we’re gonna have great liability protection, but we’re going to have problems when it comes time to pay our taxes.

[00:00:44] INTRO:

This is experts unleashed, revealing how professionals and entrepreneurs transform experience into income while positively impacting the world.

For years, Joel Erway has helped entrepreneurs develop and launch their expert based businesses growing them beyond six and even seven figures a year. Now a professional expert serves their community through paid training education or service. This podcast will help you design and execute your plan to become a six or seven figure expert without a massive team.

To get more information or apply now, visit theperfectexpert.com. Let’s get started.

[00:01:26] Joel Erway:

Hey, what’s going on everybody? Joel Erway here, and welcome to another very special episode of Experts Unleashed. And guys and gals, I am super, super excited about this interview here today because we’re gonna talk about legal stuff. Now, I know that’s not really exciting for most entrepreneurs, and I promise you it took me a while to get excited about this as well.

But the light bulb moment finally clicked. So I had a conversation with our guest here, Ross Brunson. A few weeks ago, and Ross and I were talking about his Bulletproof business structure. We were having a conversation. He was explaining why it’s so important for entrepreneurs to really take their business structuring systems seriously, and why 99% of entrepreneurs do not do it the right way.

And, and they’re doing it the wrong way. And it, number one, leaves themselves exposed to all sorts of potential legal issues that exposes their assets in case they get into, you know, a lawsuit or any sort of behavior or any sort of risk potential. And number two, When they do it wrong, they’re actually paying more in tax.

And so we had a great conversation. The light bulb moment finally clicked for me. After a while. It took me a while. I’m a slow learner and legal stuff never really gets me, gets me super, super excited. But I promise you the reason why I have Ross on here today is because this is really, really important.

And so Ross, I’m excited to have you, man. We are going to be diving into your business structuring system. Welcome to the show.

[00:02:56] Ross Brunson:

Thank you very much. I appreciate that.

[00:02:58] Joel Erway:

Ross, why don’t you take a couple seconds, 30 to 60 seconds, give our listeners just a quick background about, you know, who you are, what’s your history in in setting up entities and in setting up this business structuring system.
Give our listeners a 30 to 60 second background about yourself.

[00:03:15] Ross Brunson:

Okay? Sure. My name’s Ross Brunson and I’ve I have a nice family. I have a wife, a sweet wife I’ve been married to for almost 50 years. I have five beautiful children, 15 grandchildren, and I’ve been involved in this type of work since 1990.

I started a, an accounting business that did accounting for people and also I was doing tax returns for people. And during that time, I had many people come to me and ask me if, if I would help them set up their business and then perform the services of doing the accounting and the tax returns. So at that point in time, in early nineties, I started doing that with people.

I would get involved with getting their business set up, whether it be a corporation or an LLC, whatever it is that they thought that they needed. I would help get them, get it set up, and then I would help them with their accounting and their tax returns at the end of the year. But over that period of time, I got to know a lot about businesses and, and business structuring.

And I understood and helped my clients understand that every business entity might have a strong point, which is really good and something you should wanna take advantage of. But everyone had a weak point. And so that’s kind of what led me into what I’m doing today with you know, with my current clients.

[00:04:33] Joel Erway:

Got it. I think this is a really important point to highlight, meaning, you know, after working with entrepreneurs and working with all sorts of clients and helping them set up their businesses where did you see this opportunity that you’ve now discovered with your business structuring system? You talk about how, you know, the different types of businesses.

Some have weak points, some have strong points, but for the, just the general entrepreneur, a lot of us, when we’re first starting our business, you know, We really don’t, you know, myself included, we really don’t know what we don’t know. And so can you explain like, you know what most entrepreneurs consider when they first start up their business and why that can be a recipe for disaster as they grow.

[00:05:19] Ross Brunson:

Sure. What I find is most entrepreneurs, new business owners, they wanna start off in business and they’re all excited and they should be cuz it’s a great opportunity. But they have never had any training at all in their life as to the bright type of business. Structure entity, I might say to use, you know, so what I find is they start asking around, they ask their friends, well, what, what should I be?

You know, and I set up my company and sometimes they’ll get a, you know, an answer, you should be an llc. And they go, well, okay, that’s great. But if they were to then ask that person, why should I be an llc? The person probably would’ve said, well, I had no idea. That’s just what someone told me. You know? Or they, same thing.

They might have someone that’ll say, you ought be an S corporation. You know? And if they knew enough to ask, well, why should I be an S corporation? Again, the people are gonna say, well, I don’t. You know, this is what I heard, or my CPA told me this, or, you know, so they’re, they’re asking people that have no expertise.

They don’t understand the strengths of the entity that they’re recommending or the weaknesses. So if a person were to just take their friend’s recommendation and set up a company, they might find that that type of company will give them some tax benefit. But maybe not very good when it comes to protecting them from liability issues.

Or the opposite may be true. Maybe it’ll give them decent liability protection, but we’ll have, provide no tax benefits. So, and of course, as you say, you don’t know what you don’t know, as you were mentioning, as in the introduction, these people don’t know what they don’t know. They just think, well, okay.

You know, if someone’s telling ’em about it, that has some sort of an, an understanding. They will tell them what the strong point is. You know, this one’s gonna give you great tax benefits. This one’s gonna give you great liability protection. But they don’t ever say, oh, but there’s a downside to it that you, you probably need to be aware of, you know, before, before you jump in and, you know, and, you know, commit yourself to this type of an entity.

[00:07:28] Joel Erway:

Yeah. You know, it was, it was funny when we were talking the first time, anytime we start talking about. entities, legal, accounting, I get really sleepy, right? It’s like I just start to, you know, it just go, goes over my head and it’s just like, okay, okay. You know, I talked to my accountant whatever five years ago, six years ago when, you know, we got set up.

So I just trust them. Right? Right. And I think this is where it was really an eye opening conversation for me. It’s that my situation changed. You know, where I was six years ago was not where I am today. The business is completely different. Our revenues are completely different, our profits are completely different.

I’ve got a family now, I’ve got two kids. Like, so like your situation changes and I think this is where, you know, I, I think it was, it was a good place for me to reconsider all this. And you started to open up my eyes with like, okay, it’s not just pick the one right entity for you. You have a unique method that’s.

Multiple entities, right? It’s, it’s the way that you protect yourself and reduce your tax liability is by not choosing just one single entity. It’s actually layering and doing two or maybe three entities within your business structure. Is that correct?

[00:08:46] Ross Brunson:

Yes. Let me see if I can explain it to you. So it is easy to understand.
You know, as human beings, you know, we don’t like to be too hot in our lives. We don’t like to be too cold in our lives. We don’t like to, you know, have bugs attacking us. We don’t necessarily like to sleep in the dirt every night or cook our dinner in the dirt. And so what do we do is we build a structure around us to protect ourselves.

So we build a house. So we have this house built and we move inside and if we get too hot, we can turn on our air conditioner. If we get too cold, we can turn on our heater. You know, we can protect ourselves from all the elements outside by living in this house. But as we construct this house, we start thinking about different rooms.

You might say, well, you know, in my house I need to have a kitchen cuz I want to be able to cook dinner. Or I may need to have a bedroom cuz I may want to go to sleep and, or I might have a, a living room because I may want a place to sit down and relax or entertain guests. So when you think about these rooms, you know, we put these rooms into our house.

Each one of these rooms has a really strong point. For example, if, you know, if you’re gonna cook your dinner, the kitchen is the best place to go, but the kitchen is not a great place to try to sleep at night. You know, or you may want to have a, you know, A bedroom in your house and bedrooms are great if you want to go to sleep, but you’re not gonna want to entertain guests there, or you’re not gonna want to cook your dinner there.

So as you look at each one of these rooms, each one has a strong point associated with it, and each one has a weak point associated with it. But because we bring them all in under the same roof, we. Take advantage of each of the strong points. So when I want to cook, I can go to my kitchen. I don’t have to sleep there, I don’t have to entertain my guests there.

You know, if I want to sleep, I can go to my bedroom. You know, I don’t have to cook my dinner there. So by being able to take advantage of each of the strong points in each of these rooms, we’re able to eliminate all the negative points associated with those rooms as well. And as a result, we get the best of all worlds because we are specializing.

Our rooms are specialized for certain specific things. And when we help people set up their entities, we look for the same thing. You know, we have, you know, we wanna build a structure over their entire business. We don’t wanna just say, here’s an entity. Take this entity, you know? Cause as we mentioned, there’s gonna be a strong point to it, but there’s also gonna be a weak point associated with it.

So what we wanna do is we want to say, look, we have entities that can help you reduce your self-employment tax. And we have entities that can help you reduce your income tax. And we have entities that can protect your personal assets from something you might do in your personal life. Like you know, have you had a serious automobile accident?

And we get a judgment against you for more than your, your policy limits, you know, and, and that puts your home, your, your savings accounts, your money market, brokerage accounts, little type of things are all at risk. Well, we have rooms that can protect that. We have rooms that if you know, you have your business will hold, you know, will hold your business in that room.

And if something happened within that room in that business, it’s not gonna be able to spread through the house too you, and take your personal asset. So, By combining several entities together. Again, we could take advantage of all the strong points of each one and we can eliminate each of the weak points of, of each of those entities.

[00:12:32] Joel Erway:

That was what made it click for me. Right. It was not relying on one single entity, but taking strong points of multiple entities and combining them under one structure. Can you walk us through or maybe give us an example of say, when somebody should consider, you know, cuz the vast majority, I, I’m just gonna make a broad statement and ma and you would know better than I would.

I would say the vast majority of us are probably under just a single, a single entity. Right, right. At what point. Should we consider, at what point should our business be at where we consider, all right. Hey, it’s really worth talking to somebody like you, Ross, about building a business structure and combining multiple entities for tax reduction and asset protection.

At what point should we consider that in our entrepreneurial career?

[00:13:27] Ross Brunson:

Well, if you think about it, when you first start your business, when are you most likely to make a mistake and get yourself sued right off the bat? So why do we wanna postpone that for to some, some later time when we’re maybe more experienced?

So for liability, it would make sense right away that you start looking at in an issue. But then as you. Earning income and having to pay taxes. It doesn’t take much income before your taxes start to rise. One of the taxes we face is our Social Security Medicare tax. They call it self-employment tax. Well, it’s 15.3% on every dollar of profit that you make.

So if you take whatever profit amount that you make and you times it by 15.3%, whatever that figure is, it is, you know, it doesn’t take long before that tax obligation that you’re going to suffer is going to be. greater than what it would cost for you to create a structure to protect yourself from that.

So, mm-hmm. , I would recommend most people need to start thinking about this right off the bat. You know, get yourself set up correctly at the beginning. Make sure that you’re not gonna have a liability issue. You know, especially when you’re most vulnerable, when you at least know what you’re doing, you know, protect yourself from that.

And then also you know, if you make any type of income, you know, five to $6,000 of income, $10,000 of income, there are taxes you could save by having your structure set up even at that low level of income.

[00:15:00] Joel Erway:

Where are most people like making the mistake in, in their, in their structures? Like when, when we first start to make that consideration of like, okay, I’ve got a single entity system right now, and.
I wanna consider going into a two or three entity, you know, business structure, what’s going through their mind, what is top priority when they come to work with you? Is it primarily tax reduction or are they coming to you when they’re in hot water? They’ve made a mistake and they wanna make sure that they’re protected.

I’m assuming If it’s the latter, then it’s usually too late. If they’ve already made a mistake and, and, and they’re in hot water, it’s probably too little, too late. But what’s the general like, when do most people come and, and reach out to you?

[00:15:46] Ross Brunson:

Well, most people don’t believe that they’re going to be sued, which is sad because in America there’s a new lawsuit filed every two seconds of every day of the year.

And oh, Jesus. I even heard some of you may know Bill O’Reilly. I listened to one of his presentations and he made a comment that over 50% of all small business owners were sued last year, over 50% in one year. So yeah. That’s a problem. But most people don’t think about that problem. What they’re thinking about is, oh man, I gotta pay taxes and my business is starting to grow.

I’m starting to make more money. And all of a sudden they get a tax bill of, you know, 20,000, 30,000, 40,000. You know, like, whoa, you know, I, I can’t do this. That’s all my profits that you’ve taken, that the government’s taken from me. And so it’s usually at that point where they’re just so concerned and they’re so nervous and they’re seeing that their tax liability’s gonna be so high that they finally come and want to talk about it.

And so that’s when most of them come to us, when their taxes are getting high. But we try to help them understand that liability is also a very important part of your overall structure. But I would say it’s taxes that seem to, you know, give them the, the idea that they better talk to somebody.
[00:17:10] Joel Erway:

Do you find that most people are set up as an LLC And S corp. Are those the two most popular single entity structures when they come to work with you? L L C and S Corp? Yes.

[00:17:22] Ross Brunson:

Those are the two. And when we look at those two again, what are their strong points? The llc Strong point is it gives you great liability protection. What is the strong point of the S corp?

It gives you some good tax saving features, specifically against your self-employment tax. So those people that that talk with their CPA will usually be guided towards the S corporation cuz the CPA knows that, Hey, my job is to save you taxes and I’m gonna look like a hero because I’m putting you in an entity that will give you tax savings.

However, that entity probably doesn’t have very good liability protection when all things are considered. So, but that’s not a concern to the to the. Cpa. But if someone were to talk to an attorney that especially specializes in liability and asks them What is the best entity for me to set up? Well, that attorney is gonna be concerned about protecting them for liability.

So the attorney will always tell ’em, you, I need to be an L L C. But that attorney also doesn’t understand the fact that by telling ’em to be the llc, the weak point is that this person’s now gonna be paying more in taxes. So, you know, when they come, they’re kind of split between these. But a lot of it has come from them speaking with somebody that has a specific reason for, you know, telling them or giving them, suggesting to them what they should set, how they should set up their business.

[00:18:58] Joel Erway:

So how did you kind of discover the fact that you could. Build structures, build this corporate structure, build these business structures, and combine these entities. Was it by sheer dumb luck, was it out of necessity? Like how did you discover this business structure system that now you, you advise and you help people set up to combine the best of both worlds?

[00:19:23] Ross Brunson:

Well, it was interesting as I was running my little business, helping people set up their, their businesses and helping them do their accounting and helping them do their tax returns at the end of the year, my business was growing and I started making a lot more money. So I was falling into the same category of a lot of these people.

And so I started looking for a way that I could reduce my taxes. And I ran across a person who claimed to be a tax attorney, though I later found out that that probably wasn’t a true statement. But anyway, he was telling me about a business entity type A, what they call a business trust and how this business trust was gonna be able to save me in taxes.

So I started listening to him and, and in essence, what he was saying is that, you know, a business trust has two different ways that the owners of the trust can be paid. They can be paid for the work that they do in this business, trust running this business, and any money that comes to. In that way it would be considered active income subject to our self-employment tax and our income tax.

But he says that also they can, you can distribute funds out of the limited excuse me, out of the trust business, trust to you as a, as a, in the user of position, sort of like a shareholder in a corporation, you know, you would be able to receive distributions. And by doing that, those distributions would come to you and they would not be subject to self-employment tax.

They would only be subject to income tax. So by splitting your money between active and passive, you can reduce your. You know your self-employment tax. So I thought this is really great. So I paid him a lot of money, for helped me to set up this business trust and right off the bat, the very first year I got audited by the IRS and I found out.

At that time that you know, I had not heard much of a business trust before in the work that I was doing, but it found out that there was a lot of these people who were you know, they, that they were kind of radical a little bit and they were trying to tell people, you can, you can avoid paying your taxes by setting up a business trust and you know, and we’ll set ’em up for free for you.

And so they were making a lot of waves, a lot of noise, and the IRS was li watching it very carefully and they decided, well, we’re gonna stop this. You know, even though maybe this is true, we, we don’t want them to think that they’re gonna be able to avoid all taxes by setting up this type of entity. So they started auditing every single business trust that was set up back in the year that it was set up.

And I always happened to just be one of them. So they came to me and they said, sorry, you’re not a, we don’t believe that you’re a business trust. We believe that you’re just a sole proprietor. And if you want to prove me, Prove them wrong. I’d have to go to tax court. And so I said, well, I don’t want to pay down money to go to tax court.

So they reconsidered or recalculated my taxes as a, as a sole proprietorship, which basically meant that I had to pay the, the self-employment tax that I thought I was gonna be able to save by going through the trust. So that didn’t turn out to be a great experience for me, but it did give me an idea. It made me understand that hey, Maybe there are other entities that can provide this same tax saving feature.

You know, maybe the IRS doesn’t like the Business Trust, but is there another one? And then I discovered, well, the S corporation does the exact same thing that the business trusted exactly the same thing. But if you were an S corporation, the IRS doesn’t care. They’re not gonna come audit at you. But because of the fact that they were, you know, concerned about what was being preached about these business trusts, that was, you know, why they wanted to audit people.

So that opened my eyes. There are other entities that can do what I want to do without invoking the ire of the irs. So I started a deep study of all the different entity types that are available. To find out what benefits can they provide? You know, can they provide other types of tax benefits beside just self-employment tax savings?

You know, can they give us income tax savings? And then I started wondering about, well, liability’s a big factor. Like they say, you know, a lawsuit filed every two seconds in our country. That’s day and night holidays included. You know, I started realizing, you know, as a business owner, I could be at risk if, if somebody decided they wanted to sue me.

So again, that’s what I was searching for and what entities give me the best liability protection. And that’s what I discovered, that every entity will have a strength and every entity will have a weakness. But there was never one perfect entity that I could take that would give me everything I was looking for.

[00:24:20] Joel Erway:

So the IRS audited you because you were forming a business trust. Did I understand that? That’s correct. Correctly, yes. So what about business trust? Sends that up to flagpole. What a, what about that flags that to the i r s?

[00:24:35] Ross Brunson:

It was just the people that were promoting it.

[00:24:38] Joel Erway:

Oh, it was being associated with them. That’s what flagged it. Right.

[00:24:42] Ross Brunson:

That’s the only reason is that these people are claiming that you can avoid all taxes, not just income tax. And, and these promoters, of course, had no understanding of what that business trucks actually did or how it did it. They just got word that it could save since some taxes.

So they just started screaming that from the, the rooftops, you can, you can not have to pay a single Senate taxes if you run your business as a, as a business trust. And, and of course that wasn’t gonna fly, you know, with the irs.

[00:25:10] Joel Erway:

Okay. So it matters, what you’re saying is it matters almost equally, as much who you associate with as it does the type of entities that you end up setting yourself up with.

Is that correct?

[00:25:24] Ross Brunson:

That’s right. That’s right.

[00:25:25] Joel Erway:

That’s probably something that most people don’t, don’t realize, is that you can get flagged by the I r s just by working with the wrong people.

[00:25:34] Ross Brunson:

Right, right. Exactly right. You sure can.

[00:25:40] Joel Erway:

Geez, kinda makes me like incredibly fearful of just like stepping on the wrong toes or like, you know, thinking that you’re doing the right thing, thinking that you, you have all the best intentions in the world.

Like, hey, I’m, you know, this person says, okay, let’s set up this structure or whatever. Nope. That’s gonna trigger an i r s audit. Like, huh.

[00:26:01] Ross Brunson:

Right.

[00:26:02] Joel Erway:

But anyway, but that, you know, obviously, you know, working with you doesn’t trigger an audit. And it’s like once you, because those people were doing unethical means of promotions and obviously not being truthful.

The i r s knew that, and that’s, that’s what, that’s what flagged it, but it’s still. You don’t wanna mess with the government, you don’t wanna mess with the, with the powers that be.

[00:26:23] Ross Brunson:

No. And it was not my intention to defraud the IRS either. It was just that he was saying that this is a function of this entity, which will allow you to be able to reduce your taxes.

And that’s all I wanted to do is take advantage. If, if there’s a function within an entity that allows me to reduce my taxes, why not take advantage of that function there? And so that was my thought behind it. You know, it wasn’t like, oh, great, I’m gonna avoid paying taxes ever again. You know, that was not my concern.

But anyway, you know even though that wasn’t my concern, I still was audited. And they helped me understand right away that they, they’re in control. And that, you know, you have to play by their rules, however they write them.

[00:27:09] Joel Erway:

Those pesky IRS agents, nobody likes ’em. Hope you’re not, hope you’re not listening to irs.

I’m just kidding. Russ, walk me through an example of, let’s say, a two entity structure, right? Where, you know you know, we want that protection and we want the tax saving benefits of, you know, say an S corp, but the protection of an L L C. So, you know, it’s still puzzling to me like how these two would coincide under one business structure.

But, you know, can you walk us through how how one of these things look, how it operates, who pays who, where does the money come in? Because if you’re operating with two entities, like maybe we can just walk through step-by-step so people can start to see a clear picture of how one of these structures would operate.

[00:27:58] Ross Brunson:

Sure. The first thing that I think is most important is that we have liability protect. And the L L C provides us the best liability protection. Okay? Now when we say liability protection, a lot of people might think, well, I’m setting up this L L C to protect my business and to protect my business assets.

But that’s not a correct assumption. A and an LLC can be sued. and they could win and they could take the assets of the business. What are you protecting when you set up this llc? You know, encapsulating your business as you’re protecting yourself from your, you know, your personal assets, things like your savings accounts, your money market accounts, your brokerage’s accounts, your, you know, your jewelry.

Gold and silver, your house, your nice cars, all these things, you’re protecting me by setting up this llc. And if someone’s trying to sue you because something went wrong in your business relationship, they can’t go through that L L C to you personally and take these assets from you. So that’s the purpose of all, you know, all entities when it comes to liability protection is to keep people from going through your business, to you personally and taking your assets.

So that’s why the LLC is very strong when it comes to protecting you personally per your personal assets from somebody that’s trying to get to you because of the fact that you are you know doing business. . But now as I mentioned earlier, the downside of the limited partnership is it doesn’t give us any special tax benefits.

Any income that we generate through our L L C is going to be subject to our self-employment tax, our social security, and our Medicare tax and our income tax. So that money that comes to us is double taxed. So if we do nothing, we’re gonna have great liability protection, but we’re going to have problems when it comes time to pay our taxes.

So what we like to do then is set up another entity that can give us this protection as far as our taxes are concerned. And that second entity that we deal with quite a bit is an entity called the Limited Partnership. Now the limited partnership. Is very similar to the S corporation in that it can give us great tax protection specifically for our self-employment tax.

So if we create two entities, then our LLC is an entity and we create a limited partnership as the second entity we, and if we can combine those two, we’re gonna get the liability protection we wanted, and we’re going to be able to match the same tax saving features that the S corporation was going to give us.

So we wanna do that now. One of the ways that we would do that in connecting these two, is we would have the L L C be a single member, L L C, owned by the limited partnership. So the LLC would provide the face to the business. So all income that is generated from the sale of the products or services provided would come into that llc.

And all expenses associated with that business would be paid for out of the llc. But what’s left over then is the profits. Now the profits will flow to the owner. And in most cases, if you were an LLC and you owe a single member LLC and you know the owner of it, those profits would just flow to you and you’d put ’em in your bank account.

But in this situation, in this structure, you would not be the owner of that llc. Again, giving you some better liability protection because they can’t sue you and take something you don’t own personally. So you don’t own the LLC anymore, you’re the manager of it. You have to complete control of it, but you don’t own it.

So again, now we’re protecting ourselves from this side. You know, the side where people are suing us personally, you know, so we’re getting the business protection and we’re also getting the personal protection. You know, that lawsuit scenario where they get a judgment greater than your policy limits and they’re suing you for your assets.

That business is no longer one of your assets cuz it doesn’t belong to you any longer. It belongs to this limited partnership. So the, the profits then flow to the owner. So that flows to the limited partnership. Well, those profits normally come to. Subject to self-employment tax and income tax. But by going to the limited partnership, it is designed so that you can separate your income and take some of it as active income and some of it as passive income.

So you’re able to reduce your self-employment tax on all that income that comes to you. That is considered passive income. So by doing this, we can reduce our self-employment tax most, you know, at least in half. And some people like to do it even at a little, little higher percentage. So we have great tax saving features now by having these two together.

but that limited partnership now gives us a whole new area of protection that we didn’t have before. You know, we mentioned that we have our personal assets, you know, our savings accounts and brokerage accounts and things that are out there. And anything time we do something in our personal life, those things can be taken from us.

Well, when we set up an entity, you know, what we’re doing is we’re creating in the eyes of our laws a person. And I know that sounds really strange to a lot of people. How can a stack of paper be a person? Well, it can, because of the way our laws are written and the definitions we have in our laws, if you were to look up the definition of a person in our, you know, US statutes, or even in the IRS code, they’re gonna say, a person is a corporation.

A person is a limited liability company. A person is a an llc person is a trust. You know, all these different entity types are all considered people in the eyes of the law. But there’s an interesting twist to it, even though you know, the laws are specific, that even though you created this artificial person, and even though you control this artificial person 100%, and even if you you know, if that artificial person ha held titled to assets and those assets generated income and those, that income was distributed to you, even though all those things are true, that that person that you created is not considered to be you.

So that gives us. A way to protect ourselves. So let’s say you set up your limited partnership, which is now the owner of your llc. And so it would have to have a bank account. And let’s say at the same time you set up the bank account, you said, well, I’m gonna set up a savings account also in the name of my limited partnership.

And once you did that, you then transferred the money from your personal savings account into the savings account, the limited partner. . Well now that savings account legally does not belong to you. So legally you don’t have a savings account. Your limited partnership does, but you control that limited partnership, you control that savings account and if it earns interest, it can be distributed to you, but it’s not owned by you.

And if you had a brokerage account, you could go to your broker and say, I want to change the title of my brokerage account out of my name into the name of my limited partnership, and I wanna use my limited partnership’s e i n number, you know, for tax reporting purposes. They will do that for you.

They’ll transfer that into the name of your limited partnership. So now legally, you no longer own that. You control it. If it earns money, it belongs to you. I mean, you can distribute it to yourself, but you don’t own it. So we, we come back to that scenario where we have this accident and you have a judgment greater than your policy limits, and they’re coming after you looking for you personally.

You know, you be, you know, After they’ve got that judgment against you, the courts will bring you into what they call a supplemental proceedings hearings, where the other attorneys could be able to ask you what assets do you own? Because they wanna be able to grab them all. So they’re gonna say, do you have a savings account?

And you’re gonna say, I don’t have a savings account. Do you have a brokerage account? No, I don’t have this brokerage account. And you’re answering truthfully because those things do not belong to you legally. They do not belong to you. They belong to this other person and this other person was innocent.

That other person wasn’t driving that car into this other, you know, into the injured party. So the courts cannot go through you, or will now will not allow that plaintiff to go through you guilty in that accident to an innocent person and take that person’s assets from them. So we have a very safe place where we can now start.

Moving our personal assets into that will give us protection for things we do on our personal side. And it’s also great because the LLC laws basically state that, you know, if somebody’s injured through the business, they can cover the front door of that LLC and try to sue it and take its assets, but it can’t go through to the owner who happens to be the limited partnership and take that person’s assets.

So we’re protected from both sides because of the fact we have this limited partnership in play owning our L L C, which also gives us a tax benefit. So by compiling these two together, we got substantially better liability protection and we’re getting the tax saving features of the, of this S corporation.

[00:37:57] Joel Erway:

So let me try and regurgitate that in a way that I believe I understand it and you can tell me if I’m right, if I’m wrong. Joel, you haven’t been paying attention. You haven’t been listening. . Okay. Two entity structure, a two entity business structure at the top level is your limited partnership. This is kind of the umbrella, right?

That limited partnership owns an L L C, right? LLC is what is customer facing, right? This is what the customers are gonna use to transact with whatever products or services that you’re selling. Correct?
Am I, am I with you so far? Yeah. Perfect. Yeah. Okay. So that LLC then the only exposure that. That business has is whatever is owned in the L L C, in the L L C bucket.

Any assets that are directly owned by the L L C, not the limited partnership just with the L L C. So if there’s a business bank account associated with that, that would be associated with the L L C, that would be, I’ll throw in air quotes at risk or a liability. Is that correct? That’s correct. Okay. And so now whenever I am looking to take a distribution or a paycheck, I cut a check or a profits from the L L C and distribute it back up to my limited partnership.

Is that correct? That’s where I’m now collecting my. That’s correct.

[00:39:38] Ross Brunson:

It’s the owner of the llc and so it’s entitled to the, the profits as the owner.

[00:39:43] Joel Erway:

That’s right. The limited partnership is the owner of the llc, and so it’s gonna take the profits. Where is the connection with, like me as a taxpayer to the limited partnership?

So the limited partnership owns the L L C me, Joel Erway. Where am I now associated with the limited partnership as the owner of the limited partnership. So I’m standing above the limited partnership, is that correct? Right.

[00:40:11] Ross Brunson:

In a limited partnership, there’s two positions. A general partner and a limited partner.

The general partner runs the affairs of the company, makes all the decisions. The limited partner makes no decisions, has no manage. Authority whatsoever. The, the limited partner or partners, all that they could do is invest money into the company and the general partner then controls that money. So any money that is dispersed out to the general partner would be considered active income just like money that would be coming out of the llc.

It’s gonna be subject to self employment tax and income tax, but any money that’s distributed to the limited partners because that money is coming to them based upon the fact that it’s their money working in the company and not them. Physically working in the company, that money flows to them. That type of income is classified as passive income in our laws.

And so passive income is only subject to income tax, not self-employment tax. So that, that those profits flow into the limited partnership. Then you as a general partner, and by the way, you can be a general partner and a limited partner in the same company. Just like in an S corporation. You could be the president and the board of directors and you could be a shareholder in your company.

Same thing’s true in the limited partnership. So you could be in both positions. So let’s say that you had a hundred thousand dollars worth of profit, you know, the tax on that would be $15,300. You say, I’m gonna take half of that, a hundred thousand, I’m gonna take $50,000 as the general partner for the work that I’m doing, and I’m gonna take the other $50,000 as a distribution to myself.

Because I’m a limited partner and I’ve invested money into this company, well, you just eliminates 15.3% tax on $50,000. You know, that’s about $7,500 in tax savings just because you could split your income between active and passive because of a mechanism built within that structure that allows you to do that.

So yeah, you’re able to do that. And so that money though, is controlled by you as a general partner. And if you need that money to live on, then you just make a distribution from the limited partnership to yourself and put it into your bank account and spend it for your general needs. I know, but the nice thing is, is you know, let’s say you put that a hundred thousand dollars into the limited partnership, but maybe you only needed $50,000 during the course of needed to live on.

Well, that other $50,000. You could have put in your savings account held within that limited partnership, a safe place, as opposed to putting it in a savings account held in your name, a very risky place, you know, and so you could put it in your savings account, or you could invest it in your brokerage account, or you could, you know, perhaps invest in other business opportunities.

Maybe you wanted to get into rental real estate. And so, you know, you had set up maybe a new L l C to hold the title to your rental real estate, have it also owned by your limited partnership. The limited partnership transfers money into your L L C. It buys the rental property. The, the rents come into the L L C, the profits flow to the limited partnership again, where they are accumulated and built and allowed to grow, so that if you down the road have any other business opportunities you wanna invest in, you’ve.

you know, basically you’ve got your family bank here that you are building your money in, and it also then becomes the investment arm of your business. It then is there to make investments, future investments in anything you want to invest in. And if you don’t invest it, you, it’s building up there. When you get to retirement years, you use it to help subsidize your retirement.

So it gives you that opportunity to have a safe place to, you know, to create, you know, vehicles to allow your money to grow. And when it’s seen in there, like I say there, there’s not a risk of you losing it by either a lawsuit against you personally or a lawsuit against your business.

[00:44:22] Joel Erway:

So from a tax savings stand, Where you are able to reduce your taxes is because of the definition of passive income, active income, which is separated between general partner and limited partner.

General partner is gonna be active income limited partner will be the passive income. And the passive income is taxed at a lesser rate than active income. Correct? That’s correct. Okay. Ross, I think I’m getting it. , I think I kind of understand the general the general theme. I want to now move forward and just briefly talk about that’s a two entity structure, right?

That’s right. Limited partnership and L L C separating the two. We’ve covered that. Let’s take it one step further because you talked about when on our first conversation, a three entity structure. Now we don’t have to go into all the nuances because I think we kind of understand. General frameworks and general flows when we have, you know, multiple structures.

That was my main goal with what we just covered. But let’s just talk at a very, very high level now. When would we add a third entity and what would be the flow path of how those three would communicate and interact with each other? I’m assuming there’s, you know, there’s one entity that’s still gonna be customer facing.

Right? And then where did the other two come?

[00:45:44] Ross Brunson:

Okay, so the one tax that we have not yet addressed is the income tax. You know, we’ve talked about the self-employment tax, our social security medicare tax. So the, the limited partnership is very good in helping us reduce that tax, but it has no effect on your income tax, you know, so whatever the income tax is going to be, you know, you’d be stuck paying that unless you were to look for another entity or basically another room in your structure that will provide the benefit of, say, that you, your in when it comes to income tax.

Now, the company that we like to use to do that is the C corporation. , and you might say, well, why in the Sea Corporation? Well you know, many years ago when our, when our country was founded, you know, we had, everyone was a farmer. They worked on their farms and that’s how they supported themselves. Well, over time they realized that that’s not a very safe way to, to, to live.

You know, you could have droughts to kill your crops. So you can have hail damages or bugs eat them up, or who knows what. And so every year they’re battling with all the elements, trying to raise enough crop to be able to have money to live through the next year. And sometimes they couldn’t do it. They couldn’t get enough money to, to sustain them or enough produce to sustain them through the next year.

So so they were. You know, living in a very perilous position. Then we, our country went into the industrial age and they started doing, as they started building factories in the cities and they needed workers. So they would go to the farms and say, look, come on into this city. We’ll hire you. You know, you’ll work every day from, you know, nine to five or whatever hours they.

at the end of every week or every two weeks, we’re gonna pay you a paycheck. It’s gonna come every single week. And you know, you’re not gonna have to worry that you’re not gonna have money to, you know, feed your family. And so the farmers thought, this is a fantastic idea. So they all came racing out of the fields into the factories, and they started working.

and they found that, you know, that leveled out their, their concerns about not being able to support their families. But after a while, they started seeing that these built, that these, you know, factories were making a lot of money and, and that they weren’t sharing in all those profits. So they started, you know, going on strike to be able to force the owners to pay them more money.

And that worked for a few ti you know, for a period of time. But after a while they started saying, you know, we need retirement benefits. We need health insurance, we need disability insurance. You know, there’s a lot of things that we need that, that, you know, in addition to the money that we’re making while we’re working here.

So they started striking for these types of benefits. At the time, those benefits weren’t something that could be written off against the income of the factory. So they had to go to Congress and ask them to pass laws that would allow them to deduct these types of benefits as expenses to the company.

And so the government said that, you know, we understand and they did that, they set up those laws so that a business owner can offer, you know, some sort of employee benefit to the employee and it could be a right off to the company and it would also not be considered income to that employee. And so at that time when those laws were passed, the C Corporation was one of the only entity types that were being utilized.

So all those benefits went to the C corporation. So it can provide the largest amount in the highest levels of. Employee related benefits to the employee? Well, employee, as we mentioned, employee related benefits are a direct write off against the income of the business. So what is it doing? It’s reducing the income tax that that business owner is going to be subject to, and so they’re gonna be able to provide this benefit, reduce their taxable income.

The employee’s gonna be able to receive that benefit and not have to pay a tax on it. So we can bring this concept, this third entity, this third room into our structure, and we could put it to work. The way we would normally do that is we would then make the C corporation, the manager of the l l. LSC can be managed by a manager or by a member.

And so we want it to be managed by a manager. And this C corporation company is providing will set up to provide management services as a service that it’s gonna market. And so it’s gonna market those management services to your L L C and who’s going to be the person providing those management services?

Well, you’ll be, because you’ll be the employee of your c Corpor. And as the employee, you can receive employee related benefits. You know, your C corporation can provide retirement benefits for you. It can re provide health insurance benefits for you. They can pay a hundred percent of all medical expenses on your behalf.

You know, it can, it can provide disability coverages for you. It has a whole large number of different options that are available you know, to the employees. So as that money flows out of the LLC going to the. C corporation and, and the reason it flows is because the C corporation is providing a service to the llc, which is an expense to the llc.

So as a business expense, the LLC pays the C corporation. The C corporation has hired you. So the C corporation provides you a payroll check and provides you all of these benefits, all of which are write-offs against that income that the C corporation has received. So by bringing this into the mix, we’re able now to be able to.

Eliminate, or not eliminate, but reduce to a large extent the income tax you’re paying based upon the, the amount and the number of employee related benefits you wanna provide to yourself. So it all comes together nicely. Under this one structure, you know, we have the one entity, the limited partnership that can reduce your self-employment tax.

We have the C corporation that can reduce your income tax, and we have the, the limited partnership and the LLC that provides you liability protection for both business related lawsuits and personal related lawsuits. So by combining ’em all under one roof, just like in a house, we can get the benefits of everyone and not have to deal with the weaknesses of any of them.

[00:52:24] Joel Erway:

Is there a general rule of thumb of how much income tax will be reduced when you apply that third entity, or does it vary depending on the types of benefits that are looking to be applied?

[00:52:35] Ross Brunson:

it does vary because it, you know, the reduction comes in the amount of benefits that you pay yourself. And, you know, I think, for example, you could set up your 401k plan as a retirement plan, and your business will, could, could you know, you as a business owner can allow your employee to make contributions towards it, which would reduce their taxable income.

And so they might want to, you know, contribute a hundred percent that’s available. And this year it’s like $20,500. So they could put in that amount during the course of the year, or they might say, well, I only wanna put $500 a year in, or I wanna put a thousand dollars, I mean a month, 500 a month, or a thousand dollars a month in.

So it all depends upon how much in the way of benefits that they want to contribute. But we have run. Scenarios where we take a person, you know, an artificial person making a hundred thousand dollars and figure out what his taxes might be if he were to you know, just be a sole proprietor or a single member L l C.

And then we’ve taken that same person and we put it in a scenario where that person was you know running his llc, but we’re running his money through his, his limited partnership, reducing his self-employment tax. And the, the tax drop between those two are, are pretty good. And then we’ve run the third scenario where we have, you know, some employee related benefits associated with, with it, where we’re giving them, having them pay a hundred percent of this, the 401K benefits, helping them pay themselves a health savings account HSA account, which is a really great benefit.

And having them pay for their. They’re basically their family’s health insurance out of the, the proceeds. And in that scenario, we’ve been able to reduce the taxes between that first category and the third category by just about 50%. Hmm. That’s crazy. We had great tax savings by bringing these three entities together, plus, like I say, the the best liability protection you have available to yourself.

[00:54:42] Joel Erway:

So, Ross, as we wrap up here, you know, let’s assume that you know, an entrepreneur’s listening right now and like, okay, you know, I’m ready to take that next step. I’m ready to try and figure out, you know, what is the right path for me in setting up the proper business structure, whether it’s a two entity system, a three entity system.

They give you a call, like what’s the first step? I mean, I’m assuming there’s some sort of exploratory phase or a planning phase, like. What happens when they make that decision? All right, let’s, let’s get some protection in place while also reducing my, my taxes. How do you determine what the right structure is for them?

[00:55:19] Ross Brunson:

Well, once I decided to become one of our clients, we schedule a phone conversation between myself and the client, and I spend a good hour sometimes as much as two hours on the phone with them talking to them about their specific situation. And then we explore the options for them. And if it makes sense to just go with a two room structure, you know, at this point in time and with the idea that the third may come along when they start generating additional income, you know, we’ll discuss the pros and cons of that.

You know, whether it’s good for them to bring all three in right now, you know, we can then run these same numbers you know, for them showing if they, if they continue with the way they are, if they, you know, have the two. Two entity structure or a three entity structure, you know, the tax savings in each one of these categories that would be available to them.

So we try to help them understand right upfront what it is that they’re, what they’re doing and why they’re doing it. And then of course, we like to provide additional ongoing training you know, through, we have an. You know, a member’s area where there’s a lot of different materials, talking about lots of different aspects of this that they can go into and then they can read.

We have you know, as you can imagine with, instead of working out of one entity or working out of two or three entities, we have you know accountants that are available to help them do their accounting. With this new structure type, we have CPAs that understand, you know, what it means to be working out of three entities that we can, you know you know, refer them to that will be able to handle their tax returns for them.

So we, we try to give them as much upfront coaching and teaching as we can so that they feel comfortable in what they’re doing, and then we give them this backend support as well. Awesome.

[00:57:16] Joel Erway:

Ross, this was incredible. This is my second time kind of going through this process with you, but it makes total sense.

To me, why? You know, if you’ve hit a certain level in your business, you’ve been in business for at least a, you know, I mean, obviously you want this done as early as possible, but I think if you’ve gained any sort of traction in your business, then this is a no-brainer. Meaning, you know, the longer that you put this off, the more risk that you have and the more taxes you’re going to end up paying.

And it might sound really complicated. It might sound like a lot of mumbo jumbo. My intent with this podcast was to hopefully help simplify it and just get people to understand when you layer it together, when you put the right process in place and you, you are able to put the right layers in place to protect yourself while also taking advantages of the tax code that’s in your favor, that’s designed for, for you in an ethical and illegal manner, then you get the best of both worlds.

For me, we run an S-corp, so we’re a single entity system. We’re in an S-corp because we took ad. We wanted to do that for, you know, tax saving advantages, but, , we don’t have the protection of an L l C. And so selfishly, my questions were geared around that. Like, okay, what should we do? What should our setup be?

And and, and now like we have a clear picture of like, all right, let’s figure out how to put this together. And Ross, we’re gonna be having conversation with, with how to do that. And if, if somebody’s interested, where do they go, Ross? What’s the, what’s the u r L? Do you have a, a website that people can go check?

You know, check your stuff out, book a call with you. Where can we send people?

[00:58:54] Ross Brunson:

Yeah, we have a website. It’s businessstructuringsecrets.com. And if they were to log in there, they there, you know, or, or different places that they can go at that website that allows them to you know, schedule a, a call with our company and, you know, just kind of helps walk them through.

And once we’ve been able to talk with them on a call, if they decide they’d like to go forward with what we have to offer, then they are scheduled, you know, with a, a phone appointment with me or a Zoom appointment with me where we can discuss their specific needs at, at that time. But business structuring secrets.com is our website.

[00:59:37] Joel Erway:

Awesome. So we’ll link it down on the show notes and there’ll be, you know, links on this page somewhere else where, you know, it’s, it’ll be very clear where they can click and go. Go to that url. Ross has been fantastic. Thank you so much for, you know, opening up your. The kimono and, and just unlocking your brain and seeing how your brain works.

I think it’s really, really important for entrepreneurs to understand we’re all at risk and I actually, I never knew that 50% of small businesses got sued last year. That’s freaking terrifying.

[01:00:09] Ross Brunson:

Yes.

[01:00:11] Joel Erway:

somehow, I’ve dodged that bullet, but I mean, 50%, that’s a high rate. Like that’s a terrifying rate, terrifying rate.

So if that doesn’t get you motivated, at least protect yourself. I don’t know what will, aside from an actual lawsuit, but, okay. Anyway, I digress. So, so we will include a link down below and you’ll be able to find find where you can connect with Ross and connect with this team. Ross, thanks again my man, and we’ll talk soon.

[01:00:36] Ross Brunson:

Thank you very much. Appreciate your time today.

[01:00:41] OUTRO:

Thanks for listening to this episode of Experts Unleashed. If you are looking for new and innovative ways to design and execute your plan to become a six or seven figure expert without the massive team, apply now@theperfectexpert.com.

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