I've Set Up Over 50,000 LLCs. Here's What NOT To Do!

Setting up an LLC involves more than just filing paperwork; crucial decisions about location, ownership structure, and timing can significantly impact taxes and asset protection. Many business owners make costly mistakes by choosing the wrong state or entity structure, often realizing the error too late. This video, by CPA and attorney Mark J. Kohler, who has helped establish over 50,000 LLCs, outlines common pitfalls and the strategic "trifecta" approach to optimize LLCs for tax benefits and robust asset protection.

• LLCs require careful consideration of location, ownership structure, and timing to avoid tax and legal issues.
• The "trifecta" approach involves a revocable living trust as the foundation, an operational LLC for businesses, and an investment LLC for assets like real estate.
• Operational LLCs should generally be set up in the state where you live and conduct business, not states like Wyoming unless for advanced asset protection layers.
• Investment LLCs should be established in the state where the property is located to ensure asset protection in that jurisdiction.
• For maximum privacy and tax benefits, LLCs should be owned by a revocable living trust and managed by the owner or a designated manager.

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Common LLC Setup Mistakes [0:00]

• Many people believe setting up an LLC is a simple, one-step process of filing paperwork.
• The critical errors often occur in choosing the location for the entity, the ownership structure, and the timing of the setup.
• Mistakes such as including the wrong family members as owners or setting up the entity too early or too late can lead to significant tax costs and potential lawsuits.
• These errors are often discovered years later, when it's too late to fix them without considerable effort and expense.

"What people screw up is the location of where they set up the entity, the ownership structure. For tax purposes, how did they put it together? Did they put family members on there that they shouldn't have? And then it comes to timing. Did you set it up too early or too late?"

The Trifecta Approach to LLCs [2:47]

• The speaker, Mark J. Kohler, introduces a "trifecta" framework for structuring businesses and assets, visualized as a foundation, operations, and assets.
• The foundation is the revocable living trust, which serves as the legacy and central point for all financial flow, including income to a 1040 tax return.
• A revocable living trust is beneficial for everyone, not just the wealthy, for establishing privacy and avoiding legal complications.
• The trifecta involves you (or your trust) as the owner, your operations (e.g., a side hustle LLC), and your assets (e.g., investment LLCs).

"So the foundation of the trifecta is your revocable living trust and it's also where all of your money flows. It's down to your 1040."

Operational LLCs: Location and Purpose [5:19]

• An operational LLC is typically for a side hustle or business where income is earned and tax write-offs are taken.
• This LLC should be set up in the state where you live and conduct business to facilitate future conversion to an S-corporation and tax savings.
• Setting up an operational LLC in states like Wyoming for a business conducted elsewhere is often unnecessary and can be a "scam" or "rip-off," leading to future complications and the need to move the entity.
• The purpose of this LLC is to provide asset protection for operational activities and to allow for scaling in the future.

"This LLC, okay, is going to be set up in the state where you live because that's where you're doing business. and we're going to have to be set up in the state where you live in order to evolve to the S corporation and start saving big money in taxes."

Investment LLCs: Location and Asset Protection [9:01]

• Investment LLCs are for holding assets like rental properties, stocks, or cryptocurrency.
• For real estate investments, an LLC should be set up in the state where the property is physically located to gain asset protection from tenants or others in that jurisdiction.
• If you own multiple properties in different states, separate LLCs might be necessary for each state to ensure localized asset protection.
• The decision on how many LLCs to set up depends on the quality, equity, and risk associated with each property, not just the quantity.

"I am actually required by the Secretary of State of Tennessee if I want asset protection in Tennessee from the tenant that might get hurt, pissed off, or whatever, I need to have that LLC registered in Tennessee."

Professional Setup vs. DIY [12:01]

• While setting up an LLC yourself is possible through online services, it's not recommended for first-time business owners or investors navigating the trifecta.
• Professionals can ensure you have all necessary documents like operating agreements and membership certificates, and that the entity is correctly managed and registered.
• The speaker advises using a lawyer for initial setup, estimating a cost of around $1,000-$1,200 for a consultation and entity setup to avoid costly mistakes.
• Attempting DIY setup without experience can lead to errors that are more expensive to fix later than getting it right from the start.

"But when you're just getting started, please realize that using a professional might actually save you money and help you scale faster and build your wealth quicker."

Advanced Asset Protection: The Wyoming LLC Role [17:00]

• Wyoming LLCs can play a role in advanced asset protection, not as a primary entity for operations or local investments, but as a holding company for other LLCs.
• This creates an additional layer of protection, often called a "COPE" (Centralized Ownership Protection Entity), where a Wyoming LLC owns your state-specific LLCs (e.g., Tennessee, Georgia).
• This structure makes it harder for plaintiffs to access your assets if they sue you personally, as they would first have to penetrate the Wyoming LLC.
• The speaker criticizes the widespread promotion of Wyoming LLCs for small businesses without understanding their specific utility in complex asset protection strategies.

"What happens if someone comes after you and they're going to sue you? They cannot get into the LLC, the Wyoming LLC that happens to own your Tennessee LLC, your Georgia LLC, and your Arizona LLC because what you've done is created this extra layer of protection."

Ownership Structure: Trust and Manager Management [23:50]

• Initially, an LLC might be owned directly by you, but the ideal long-term structure is for your revocable living trust to own the LLC 100%.
• Avoid putting spouses or children as co-owners of the primary LLC, as this can complicate tax filings (e.g., requiring a Form 1065 instead of Schedule C or E).
• LLCs should ideally be set up as "manager-managed" rather than "member-managed."
• Manager-managed LLCs offer more privacy in most states, as only the manager's information is disclosed, not the owners'.
• Using a registered agent service, like the one offered by the speaker's firm, can further enhance privacy by keeping your personal address off public records.

"The next point, we are always going to set up manager managed LLC's. I it's so important because as a manager managed LLC in really 49 states, Arizona is one of the ones that kind of using that example earlier as one of the pain in the butt states where I have to disclose the owners."