Best Real Estate Investing Advice Ever Show Podcast

JF1083: Asset Protection Can MAKE or BREAK Your Business #SkillSetSunday with Aaron Young

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There are so many little nuances and legalities that a lot of probably are not doing properly. Did you know that even if your corporation only has one decision maker (you), you’re still supposed to have a documented board meeting and board resolution for most decisions? Aaron tells us many more little known laws that we may be skipping over. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Aaron Young Background:
-CEO of Laughlin Associates, a 45-year-old company that’s helped 100,000 entrepreneurs start & grow their business
-Creator of The Unshackled Owner, a program for entrepreneurs looking to build a business
-Has been advisory board member for International Crowd Funding Association
-Based in Portland, Oregon
-Say hi to him at http://aaronscottyoung.com/

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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluff. With us today, Aaron Young. How are you doing, Aaron?

Aaron Young: It’s good to be here with you, Joe. It’s always great to talk to real estate investors. I love this group of people.

Joe Fairless: Well, that makes me smile from ear to ear; I love that group of people as well, because I am one of those people. A little bit about Aaron – he is the creator of The Unshackled Owner, which is a program for entrepreneurs on how to build a business. He’s also the chairman and CEO of Laughlin Associates, which is a company that helps form corporations and LLCs. He’s helped over 100,000 entrepreneurs to start and grow their business, and his an advisory board member for the International Crowd Funding Association. Based in Portland, Oregon.

Because today is Sunday, Best Ever listeners, well, we’re doing Skillset Sunday, like we usually do on Sundays. Today we’re gonna be talking about asset protection, so that we can keep what we earn. With that being said, Aaron, do you wanna give the Best Ever listeners a little bit more about your background and your current focus before we get into asset protection?

Aaron Young: Yeah, you bet. I guess this is gonna betray my age a little bit, but for 34 years now I’ve had employees – in other words, I was responsible for a payroll – and my business has always been business-to-business. In other words, I’ve been helping other business owners do something to keep their company safe and sound, and for the last 20 years, that’s been very specifically involved in buying and merging companies that were in the corporate formation and management business. So now we represent tens of thousands of business owners, whether they’re enterprise level businesses, movie studios, famous people, to individuals who have things worth protecting. I think that really fits this group.

We have thousands of real estate investors, and we’ve been with those people — we were with them all the way up to ’08, and then a lot of them disappeared in ’08 and ’09, and then the people that had held their money back came and started buying up all those depreciated assets. So we were a big part of that back end, buying up non-performing notes and foreclosures, whether that was a bank foreclosure or like a county tax foreclosure. We have had a lot of that, and now of course we’re back into this zone where there’s a lot of people that are fixing and flipping and building apartment buildings, building multifamily of different sorts…

I’ve spent many years working with people who are real estate investors, it’s a place close to my heart; so anyway, I know a little bit about something that goes on in their minds. Besides that, I’m a guy who likes to start companies, that’s all I’ve ever done. I’ve gotten really involved with everything, from lots of private companies to a couple of public companies, and had some real good successes, and a few really epic failures. So I’ve got some scars for these 34 years, but the fact is – your audience can understand this – you’ve gotta keep taking steps forward, because not every deal is a perfect jewel. But if you kind of make your way forward, you end up having  a lot of success and making a lot of money, but really building a life that you can love.

Joe Fairless: Let’s talk about your asset protection approach with Laughlin Associates. What is the number one thing that real estate investors hire your company for and what’s something that they should be hiring your company for?

Aaron Young: That’s a great question. The number one reason people come to us is they wanna form an LLC. Real estate investors are madly in love with LLCs and LLCs are a good vehicle to do a lot of your real estate investment through, especially if you’re using investor money, you’re finding a deal and then you’re getting investors to put money in. So LLCs are great for a number of reasons, so that’s good.

The thing that they should be hiring us for is most people are not thinking very strategically about how to own things, how to do different things with their business… So while you might be holding real estate in LLCs, you might wanna have a C corporation – maybe an S corporation, but probably a C corporation is kind of your mother ship; this is where your money lives, this is how you do property management, this is how you deal with your contractors, and then you’re owning the individual properties or little buckets of properties in those LLCs. That’s one thing.

The biggest thing where people drop the ball and put themselves and everything they’ve built at risk is they don’t do the corporate formalities that the law requires them to do – things like having board meetings, keeping minutes of those meetings, passing resolutions, issuing stock or membership certificates of that corporation or LLC. And why don’t they do it? They don’t do it either because they know about it, or it doesn’t make any sense to them, that if they’re the one director of the business, Joe, they think “Why would I have a freaking meeting with myself?”

Joe Fairless: Yeah, it sounds stupid, right?

Aaron Young: It sounds like I’m some kind of schizophrenic guy. [unintelligible [00:07:18].10] Well, it sounds like you’re out of your freakin’ mind. So people don’t do it, but the problem is if you don’t do it, you’re not gonna be protected under the law.

When I go out and I give talks on this topic – I call it “building your corporate fortress” – my audience is usually very quiet during the whole 90 minutes. I had a really interesting experience – a real estate investor actually came up to me the other day… We were down in Orlando, I had just spoken at a conference, and he said “I heard you give this talk about a year ago, and it’s very different the second time.” I said “What do you mean?” and I thought he was gonna say it’s kind of dull, “I’ve already heard all of that stuff before.” He said, “The first time I was so scared the whole time I was listening to your talk; I was texting my wife, I was texting my partner, going ‘Oh my gosh, we’re in deep trouble.’ The second time was really fun to listen, because now I’m your customer and now we’ve got everything caught up. I didn’t even know there were all those funny stories and everything in there, because I was too freaked out the whole time.”

Because when you really shine a light on what people are supposed to be doing and they realize that they’re not doing, and that’s like 95% of the small business owners out there, it’s terrifying. But once you get it in place, it’s a huge relief. Once you know the rules and you’re following them, and you know that you’re safe in case something bad happens, it’s a real stress-relief where you sleep a lot better at night, when you know the rules and you know you’re following them.

Joe Fairless: I think you mentioned meeting minutes and resolutions and issuing stock… Can you give us a list of the biggest things that most people don’t do that put their assets at risk, within the context of those things?

Aaron Young: Yeah, the first thing is — let me just give you a very simple example, and then I’ll kind of give you a little bit of a lesson. Let me tell you, there’s over 300 items that the law requires that you document in a board resolution. Most of us just don’t even know what they are, but let me give you a simple, simple one. When that investor goes out and they’re gonna now set up a unique bank account for this LLC that they’ve set up – it’s gonna be XYZ LLC, and this is where they’re gonna start buying and holding or buying and flipping real estate.

If you go to the bank, you go down to Wells Fargo or Bank of America and you say “Hey, I wanna set up this bank account”, the bank officer, when they have you fill out all your forms, they’re going to pull out a generic board resolution, they’re gonna ask you if you’re a director, and you’re gonna say yes, and then they’re gonna have you sign this kind of boilerplate piece of paper, along with a bunch of other pieces of paper, because the bank can’t open a bank account for you unless you have a board resolution that says it’s okay for you to open that bank account.

People wanna change CPAs, people wanna take in a loan from somebody, or they wanna make a personal loan into the business. All of these things have to be memorialized in a board resolution. If you wanna sign a lease, if you want to give yourself a car allowance, if you wanna get medical insurance, if you wanna do any of these things where the company is gonna pay for something, then there’s got to be a board resolution.

And so I think a lot of us — we grew up watching movies and television shows where there was a board meeting, when there were all these suits sitting around a big mahogany table, or something… And it’s no surprise that General Electric or Apple or Disney have a board of directors. We all understand that corporation has a board. But when it’s our little corporation, that we took our savings, or we redirected our IRA or our 401k, or we max out some credit cards to get started – the idea of us being anything remotely like General Electric doesn’t even occur to us. We’re mostly just trying to get something going – find the next deal, make the next sale, something holding on by our fingernails to survive, because our expenses were way out of line… So the idea of acting in this way – we don’t think about it, even though sort of in the back of our mind we know we’re supposed to do something, but we don’t know what to do, so we just do nothing.

Joe Fairless: Okay. Is this taking things to the extreme? And how practical is this for someone to do…? I don’t think it is practical, unless you have a service, which I imagine — does your company do this for LLCs?

Aaron Young: Of course, yeah.

Joe Fairless: That makes sense, that’s a smooth segue. So you provide the solution for this. Are you an attorney?

Aaron Young: No, but I work with over 100 law firms [unintelligible [00:11:42].24]

Joe Fairless: Okay, so you work with law firms. What liability have you been told that this opens up investors to, and how have you seen investors get in trouble?

Aaron Young: First of all, this isn’t sort of theoretical, this is real. Let me just give you some specifics. 94% of the world’s litigations happen in the United States. Every 22 seconds there is a new lawsuit filed against a corporation or an LLC. Every 22 seconds.

57% of all those lawsuits are filed against companies that are earning a million dollars or less. So I don’t mean top line, I mean bottom line earning. So that’s every main street business in the country. Every doctor’s office, every restaurant, most every real estate investor… That’s who’s getting sued. And why? Because there’s an easy target. Here’s why.

According to Cornell Law, the number one most litigated issue in business law is piercing the corporate veil. In other words, they wanna get whatever’s in the company, which may be a lot or may be very little, but they also wanna get whatever the owner has – it doesn’t matter, it could be equity in a house, it could be their kid’s college savings, it could be the coin collection their grandpa left them… Whatever. They want to get as much as they can get, and so piercing the corporate veil has become the most litigated issue in corporate law. That’s litigation.

Let’s look at audits. Audits have been going up, up, up. The more government programs we have, the more the government says “We need to make sure everybody’s paying the taxes that they’re supposed to be paying. So the way we’re going to kind of spot-check that is by audits.”

Since 2009, the number of audits against companies of five million dollars of higher has actually gone down 22%. But the number of audits against companies five million dollars or smaller, which is probably almost everybody that’s listening to this podcast…

Joe Fairless: Oh, you don’t give us enough credit…

Aaron Young: Well, I’m talking about earnings, I’m not talking about transactions.

Joe Fairless: Still… We’ve got some high-achievers.

Aaron Young: Okay. Well, I’ve got a number of hundred million dollars plus investor clients, but the vast majority of people are trying to make $25,000, $50,000, even $100,000 on that transaction, but you’ve gotta do a lot of transactions to earn five million dollars. So here’s the point – the percentage of audits against companies of five million dollars of less is up 38%. Why? Because the government, just like the Court – or, I should say, the predatory litigator – they both know that small businesses are easier targets, because they don’t have in-house counsel, they have uncle Fred doing their taxes, or they’re using TurboTax or whatever, they’re not keeping receipts, and the number one thing that pierces your corporate veil is, even if you’re set up as a corporation or LLC, if you don’t follow the law that says you must not treat your company like your alter ego, it’s gotta be utterly separate, and the only thing that shows the separation is the corporate minute book – because people don’t do it, that leaves them open.

And I’ve seen – because of the business that we’re in, and I don’t wanna exaggerate this, I’ve personally seen probably hundreds (and I know of thousands) of times where people have said “I went through this horrible experience, I lost everything/ I got my backside handed to me. I can never let that happen again.” And I could give you lots of anecdotal stories. The fact is that is what’s going on, and if you research it, there’s just a ton of information out there about companies having the corporate veil pierced because they didn’t follow their corporate formality rules.

Joe Fairless: The over 300 items you document in a board resolution that you referenced earlier are all those included in the corporate minute book? Is that what you’re referring to? They all ladder up into that?

Aaron Young: Well, your corporate minute book is where you put the stuff – you’ve got a meeting today, your minutes say “On this day, these people got together and talked about this stuff.” That’s the minutes. And then whatever was decided by those people, those are the resolutions. So your board secretary – like I said, I think I used General Electric or Disney or something as an example… They would have a board secretary who understands, “Oh, that needed to be documented in a resolution. Oh, we need to have that in the minute book.” That would be their job. People who have experience with this kind of formality.

The local flipper who’s also a general contractor, the person who’s really great at raising money so they can go and buy up those four condos and flip them or get people in them or kick people out and then renegotiate and get new renters or new buyers in – those people don’t have, for the most part, experience. And even if they do, when it goes from “I worked for a big public company and I was a board secretary” to now “I own a restaurant”, they don’t make that transition in their mind, that “We understood why we had to do it there, but we don’t here.”

And most people say “I’m so small, I probably will never get looked at”, and the fact is the small companies are the biggest ones at risk. I don’t wanna come off like I’m trying to scare people into buying something. The fact is we’ve been in this business for 45 years. We’ve helped over 100,000 business owners and hundreds of thousands of companies go from cradle to grave; start, grow, sell, crash, whatever… And I just know that this most basic, fundamental element of corporate ownership is one of the  things that gets ignored, because people are focused on marketing, sales, service delivery; they’re not really thinking about themselves like a big company would. But they want all the same protections that a big company would get.

Joe Fairless: On average, how much does it cost to have your company do what you need to do to make sure that an LLC is up to date with everything?

Aaron Young: I didn’t know you were gonna ask me that question, thank you very much. It’s $1,000 for the first year, and we go back three years, get you caught up with everything that should have been there, and then it’s a 12-month service. In that 12 months we’re gonna go back and get you caught up for three years, which is the average time in audit where a lawsuit will look back,  plus we’re gonna make sure that every month we’re calling you and we’re interviewing information out of you, and in five minutes a month we can typically get everything down that needs to be done. You have a person that’s assigned to you; they call you every month, you answer the questions, they send you the formal documents, you sign them and put them in the corporate book, and if you don’t already have a corporate minute book, we’ll provide that.

If you have more than one company, the second company is $595. Next year, because we have an 86% renewal rate on this product, next year the renewal is $495 per company, and it’s “I’ll do it for you” – we’re calling you every month. You don’t have to know or do anything except for pick up the phone when our person calls.

Joe Fairless: Sounds good.

Aaron Young: It is good, that’s why we have right now tens of thousands of clients that are having us do it, and that’s why 86% if them renew, which… Figure out how many companies fail – that’s a pretty dang high renewal rate. I think of all the things we do it’s one of the least expensive things we do, and I think it’s THE most important thing that we do for business owners.

Joe Fairless: Aaron, with this conversation as far as the biggest thing people do or don’t do to put your assets at risk, is there anything else you quickly wanna mention that we haven’t discussed as it relates to this topic?

Aaron Young: Yeah. A lot of people co-mingle funds. An example of that — there’s a lot of examples I could give, but here’s a quick one. Let’s say you have a credit card and you use that credit card for personal stuff: birthday presents, food, travel etc. Then you start this new business and you think, “Oh, I wanna keep those transactions separate from mine.” You don’t have any business credit yet, so you apply for a new credit card from CapitalOne or somebody… One of those envelopes you get every single day in the mail.

You get that credit card and you say “Okay, this is gonna be my business expense credit card, and this one over here will remain my personal expense”, and then you are just perfect in separating those things. So you only use this new CapitalOne (or whatever it is) card for business expenses, and you’re perfect and you get the statement, and it comes in the mail and you get out your yellow highlighter and you look and you go “Yeah. Business, business, business. Perfect”, [unintelligible [00:19:49].25] for everything on there, and you grab your corporate checkbook and you fill out the amount and you pay out the credit card bill, you send it out, you pay it early… Right? Well, you just pierced your corporate veil. As soon as you had a corporate checkbook pay for that personal credit card, even though it’s all business expenses, you just co-mingled funds. You acted like the business money was your money. Because if you worked for a big company, you would use your personal card, you would submit an expense report, along with that yellow highlighted and receipted bunch of evidence; the company would reimburse you and then you would pay your credit card bill.

But we take out that middle step when we’re small business owners because we think it’s ridiculous. “After all, that’s my company. That was my money that was invested. It’s my time, I’m the only one at risk, so of course the company should pay this bill.”

As soon as we take out that step and we treat the business like our alter ego, as soon as we do that, we’ve pierced the corporate veil, we’ve said the company isn’t separate from us. If I could tell your listeners one phrase that they should memorize, it’s this – “I am not the corporation, the corporation is not me. I am not the LLC, the LLC is not me.” If you can remember that you’re separate, just as separate as you and I are, Joe. No matter how connected, no matter how much we’re dear friends, no matter how much we’re pulling in the same yoke, you and I are separate individuals, and if we’re gonna have any kind of business interaction, we’re gonna document it, we’re gonna explain it. If I’m gonna borrow money from you, you’re gonna tell me how often do I need to pay you back and at what rate… But we don’t do that with our businesses, and by not doing it, we put everything that we’re building at tremendous risk. That’s why we have so much litigation in this country, and that’s why companies have a 50%-95% chance, according to Wake Forest Law… They say a 50%-94% (I don’t know how they got that spread) chance of losing your personal assets to satisfy a business judgment, because the corporate veil was pierced.

Joe Fairless: Aaron, where can the Best Ever listeners get in touch with you?

Aaron Young: They can go to LaughlinUSA.com and check us out there, or you can call 775-883-8484. If you have a question about anything I’ve said, just call up and say “I need to talk to somebody about this stuff.” You can call for free as many times as you want, there’s no obligation to do any business with us. We’ll answer your question because we know the reason you can survive 45 years in a very competitive business and be the leader is because we know that not everybody’s ready to do something the first time they call. They need to get their questions answered, so that’s why consulting at Laughlin is always free.

Joe Fairless: Aaron, thanks for being on the show, talking about the biggest thing that puts our assets at risk, which is adhering to the logistical and administrative things that relate to our corporations or entities, that the majority of entrepreneurs ignore, or don’t do to the fullest extent that they need to. You gave some specific examples, like issuing stock, resolutions, and as you said, there are over 300 items that you document in a board resolution, and just making sure we have all those things taken into account. So thanks so much for being on the show, Aaron. I hope you have a best ever weekend, and we’ll talk to you soon.

Aaron Young: Thank you.

 

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