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Show notes for Partnerships & Entities with Mark J Kohler!
We have Mark Kohler on the podcast today!
Joe
Mark tell us your life story and how you ended up living in Driggs Idaho.
Mark
I love WA state, am a Hawks fan, UW, etc. I’ve skied at Stevens.
I went to college at University of Utah.
I lived in Orange County before moving to Idaho. But I couldn’t pay the taxes in CA.
Julie
What drew you to accounting?
Mark
I’m an entrepreneur, and I grew up having the lemonade stands. And my dad had rental properties, and we grew up cleaning them.
Then I fell in love with the numbers and had a teacher that was a tax lawyer.
In life there are multiple factors.
What we do now… I’m a senior partner in a law firm and accounting firm. And I’ve worked with small business from day one. Over 20 years we now have over 100 employees. I own rental properties myself. But my rentals don’t do well.
That’s me, and that’s what I do.
Julie
My 12 year old girl Addison told me that we needed to go get this new toy that was going to sell out, and that she could start an Etsy account and make money.
When is the right time to start an LLC for their biz?
Mark
That’s like asking when I should start growing a crop of bananas…
First, is when you buy your first rental. Done. After closing, deed to an LLC.
Second, I like LLC’s for people who are starting an operational business. Once you get to $30k we want you into an S-Corp. If you have an LLC you can back it up into an S-Corp.
Operational business is a handy man, or selling on Etsy, CPA, dentist, doctor…
It’s expensive… $150.
Third, is for partnerships. Where you can have holding LLC’s and operational LLC’s with partners.
Julie
My next question was to have an LLC or an S-Corp.
Mark
If you have an operational business you’ll want an S-Corp, period. An LLC is an S-Corp in waiting. I will only go up to a year back.
Julie
What if somebody is a real estate agent, general contractor, and real estate investor?
Mark
From an IRS standpoint I would have you in one S-Corp. We aren’t talking about rentals, we are talking about fix and flip. In this example, we are talking about fix and flipper.
The first problem is the state licensing boards. For example with the realtor and contractor licensing. And there are exit strategies for all of those.
Julie
So everyone will need a deep dive into a their own situation.
Mark
Yep, but you want to have one S-Corp and then subsidiary LLC’s. My S-Corp is the partner in operational LLC’s.
Julie
What is a series LLC and should we talk about it or not?
Mark
Corey, is that a tax and legal playbook over there. My book. I have a table that shows all the states that are series LLC states. If you are not in a series LLC state then you can’t use them.
I like the series LLC in states like Tennessee.
Julie
Now we know that Mark’s book can help you learn more.
Mark
I want you to know that I can setup as many LLC’s as you want. Just don’t think that setting up an LLC yourself is all that an LLC is. There are a ton of parts to setup an LLC correctly. Don’t hire me, but DO follow the rules and set them up right.
We have a $450 setup and we set them up where you need them.
Julie
If someone is going to do it correctly from the beginning… what is a decent number to get some started on the right path?
Mark
This is not an infomercial. You have to watch out for that garbage where you go out and spend thousands of dollars to get setup for something that don’t need.
Find a lawyer, not an online website. Just getting started. Pay them for the first LLC, get a plan done, and know why you’re setting up what they’re setting up. We charge $800 and you get an hour on the phone. Or we have a paralegal that will do that for $450. Then once you have a few rentals… you do the paralegal thing.
To you seasoned investors… get a yearly review. Pay for an hour review once a year.
Julie
If you have an LLC in WA can it own a rental in that state?
Mark
Your WA LLC an own rentals in other states, but it’s doesn’t protect you. You have to register your WA LLC in the other state that you’re going to buy the rental in.
You can also setup an LLC in that other state and have your WA LLC own the out of state LLC.
BUT there are so many variables that we like to know your whole situation and do a consult.
I you are a high level investor… we want to have an additional layer and hide you. So I might have a Wyoming LLC that gives you protection and privacy.
Julie
We are getting to our big question here… partnerships.
Mark
If you really want to get into a lawsuit at your next family reunion, start collecting money.
Partnering…. This is really really important. There are 3 different people… lenders, partners, and investors. You cannot be both. Once you get a share of the profit you are a partner, period.
Julie
For participating profit interests you are under the gun.
Let’s say an investors meets a seller and would like to buy the property with an upside profit at the end for the seller. Can they do this?
Mark
You would sign a partnership agreement with them and pray there is not some mess that could arise, which there are 50 different variables that could go wrong. People will say that they’ve heard they can do this from other people.
We forum shop to get the answer we want not the answer we don’t like.
I have solutions for this but it’s a bunch of stuff that you don’t want to talk about.
You are making the seller a partner on the rehab and the sale. If I’m a lawyer on the side of a vendor I’m suing everyone in the mix.
Julie
Sometimes the sellers are the ones that are bringing this up. And you could tell them about the issue of getting caught up in this.
So it could be used in the reverse.
Mark
That’s a whole podcast in itself.
But back to partnering. If you want to raise money. Don’t call them an “investor”. If you are going to use the word investor you need to understand the scilent securities law.
Julie
We are the Seattle Investors Club… we have people that come on our weekly meetings that have a deal and ask… who wants to partner.
So, I’d like to get in the deal with them to help, but not be a lender, I want to add value. Then we have a GC that wants to partner up and do the physical part.
Mark
I like that they used the P word for partner. If anyone shows up in a meeting and says I’m looking for investors, you need to tell them they are really looking for partners.
Let’s say you have someone finding the deal, another person brining the money, and a third doing the GC. All for a long term rental.
But two of the three people can vote the third person off the island.
When you get together and someone in the meetup is looking for two partners… Your next step is to involve a lawyer and draft an LLC. If one of the people says I have the docs already… run for the woods.
Julie
What if the first person has the deal locked up in an LLC, can they use that LLC?
Mark
We want an LLC that defines the relationship between the partners. That has its own bank account. That files its own taxes.
Julie
What if we only have two people?
Mark
Well, there’s another half an hour.
On this note, I’ve been doing this 20 years and am trying to take only one new call a day. But for years if I just 3-4 appointments a day, I’d be doing a thousand consults a year. Do you think I’d see patterns of success.
When you get on the call with me you aren’t paying me for the LLC, you are paying me for what you don’t know. And the 1000 people that I talked to before you, and learned from.
Julie
The takeaway is that you’re not looking for an investor, you’re looking for a partner.
Mark
Could I use a JV instead of an LLC, sure, but that’s a whole different conversation. But I wouldn’t do this for a long term rental agreement.
Joe
This is such a good podcast! You need to actually listen to this or watch on YouTube!
Julie
If there is unequal distributions in a partnership, can that work?
Mark
This is called special allocations. It’s very complicated and usually has a lot of zeros involved.
Julie
Real estate investors are wanting to write off all their expenses all the time, but I tell them they need to have some income. But does it make any sense to weigh how many business write offs you take vs. your solo 401K… does that make any sense?
Mark
Look up the backdoor 401k on YouTube. And sweet spot 401k on YouTube. We want a trifecta of all those factors.
Julie
Tell us your story!
Mark
Checkout the audio/video to hear the story!
Julie
One fun question at the end… what would you do if you were not a tax legal expert?
Mark
I’d be living Joe’s life. I think one of life’s biggest challenges is figuring out your what, and who are you. Part of me wants to say that I wouldn’t be doing anything else. I am working a little bit too hard and want to ski a little more. On the day I die I want to publish a blog article and kick the bucket in the afternoon.
I want to give away a Tax and Legal Playbook to one of your listeners.
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