Protect yourself from Bureaucrats, Buffoons and Burglars
Rich dad always said it’s not how much money you make that matters, it’s how much money you keep. And knowing how to protect yourself from financial predators is key to ensuring how to protect what you keep.
The world is filled with people and organizations waiting for the opportunity to help themselves to your money. Many of these people and organizations are very smart and powerful. If they are smarter than you, or have more power than you, they will get your money.
Bunnies, Birds, and Bugs
Rich dad’s lessons to his son and me on the importance of protecting money from financial predators started at a very early age—before we had any money. Because we were young, rich dad used a very simple example of farmers to make his point. He said, “A farmer needs to protect his crops from bunnies, birds, and bugs. Bunnies, birds, and bugs are thieves to a farmer.”
Using the idea that bunnies were thieves served as a powerful lesson to me as a young boy. Bunnies were cute and cuddly. They were harmless. The same was true of birds. In fact, I had a pet parakeet at home and to label a bird a thief was a harsh concept. Bugs, however, I understood. I knew how they could be labeled thieves. I had a garden at home, and I lost many of my vegetables to bugs.
Protect yourself from those standing behind you
Rich dad was not trying to frighten us. He simply wanted his son and me to be aware of the real world and learn to protect ourselves. The reason he used cute creatures such bunnies and birds was to make the point that some of the biggest thieves of our personal wealth are not just bandits, criminals, or outlaws.
He used bunnies and birds because he wanted us to remember that some of the greatest financial predators are people and organizations that we love, trust, or respect—people or organizations we think are on our side and are standing behind us. Rich dad said, “The reason so many people stand behind us is because it is easier to get into our pockets from that position. One of the reasons so many people have financial problems is because they have too many hands in their pockets.”
Continuing on with his “B” theme of bunnies, birds, and bugs for labeling farmers’ predators, rich dad’s list of real-world financial predators included: bureaucrats, bankers, brokers, buffoons and burglars.
For the purposes of this blog we are going to focus on the solution to the two biggest destroyers of wealth: Taxes (bureaucrats) and Lawsuits (buffoons and burglars). And to do that I’m going to share with you what my Advisor, Garrett Sutton has taught me over the years.
The First B: Bureaucrats
Protect yourself from paying too much in taxes
As you may or may not know, taxes are the average person’s single largest expense. The job of the tax department is to get your money and turn it over to a government bureaucrat who spends it.
It is important to know that, as an employee, there is nothing you can do to avoid taxes. That is a very real problem because right now the government is pumping money into the economy to counteract the economic damage done by the Covid-19 reaction. How do you think the government is going to pay for all that money? Taxes.
While employees may not be able to avoid the tax hammer that is going to come down on them, investors and entrepreneurs can. The solution to the tax problem is to invest in real estate, or start a business. Both of those suggestions can be done while you keep your day job.
In order to use investments and the ownership of a business to protect yourself from paying an excess in taxes, certain steps must be taken. The main step is to set up a legal entity. My personal advisor, Garret Sutton, is a master at this.
There are six main entities the government recognizes:
- Limited Liability Company (LLC)
- Limited Partnership (LP)
- C corporation
- S corporation
- Sole Proprietor
- General Partnership
Note from Rich Dad Legal Advisor, Garrett Sutton
Never use a Sole Proprietor or General Partnership. The government views these as too small to matter and provides no tax benefits to them. Also, be very careful which state you set up your business in. You do not have to live in the state you set your business in and certain states protect you much better than others
Remember, tax laws are set up to help you become wealthier, but you must do what the government wants you to do. When you do, you make more money and you pay less in taxes. Why? You are doing activities the government views as important for the economy. So getting a business or investing entity setup allows you to get a lot of tax breaks.
By running your expenses through your business you get to write them off. Once you have a properly filed business almost any expense can be deductible under the right circumstances. This includes things like food, entertainment and travel—even your house.
In the U.S., the tax law requires each business deduction to meet three requirements.
- Must have a business purpose
- The expense must be ordinary
- The expense must be necessary
These three rules are not difficult to meet. You just have to change the way you see your business. Your goal is to run as many of your expenses possible through your business—legally.
Be careful not to let greed destroy your strategy. For example, when you go on vacation you can write a lot of that off if you do some business while you are there. If you can have a legitimate meeting at your vacation destination then deducting your travel is a great idea. But if you go on vacation and lie about it being for business you are opening the door for some big I.R.S. troubles.
The Income Stream Is Sheltered
In Rich Dad Poor Dad, I briefly covered why the rich use corporations for tax protection:
By passing the income stream from assets through your own corporation, much of the income that is normally taken from you by the government through taxes can be sheltered.
The harsh reality is that, for employees, the sequence goes like this:
EARN >> TAXED >> SPEND
As an employee, your earnings are taxed and taken through withholding taxes even before you get your paycheck. So if an employee is paid $30,000 per year, by the time the government gets through with it, it’s down to $15,000. With this $15,000, you must then pay your mortgage and all your other daily expenses.
If you pass your income stream through a corporate entity first, this is what the pattern would look like:
EARN >> SPEND >> TAXED
By passing the income stream from the $30,000 through a corporation, you can expense much of the earnings before the government gets their hands on it. If you own the corporation, you make the rules, as long as it conforms to the tax code.
For example: If you own a business, you make the rules, you can write into the bylaws of your company that child care is part of your employment package. The company may pay $400 per month for child care out of pre-tax dollars. If you pay for it with after-tax dollars, you have to effectively earn almost $800 to pay for that same child care.
The list is long and the requirements are specific as to what an owner of a corporation can write off that an employee cannot. Certain travel expenses can be written off with pre-tax dollars as long as you can document that you conducted business, such as a board meeting, on the trip. Just make sure you follow the rules. Even retirement plans are different for owners and employees, in many instances.
Having said all of this, I want to stress that you must follow the required regulations to make these expenses deductible. I believe in taking advantage of the legal deductions allowed by the tax code, but I do not recommend breaking the law.
The Second B: Buffoons and Burglars
Protect yourself from lawsuits
There are many ways to protect yourself and your wealth, such as a house alarm, insurance, a gun, or a dog.
To protect your investment or business I recommend using a corporation entity like the four “good” entities below:
- Limited Liability Company (LLC)
- Limited Partnership (LP)
- C corporation, and
- S corporation
Protect yourself through a corporation?
In an LLC, like a corporation, the owners do not face personal liability for business debts or for legal claims made against the company. In this day and age when litigation can unexpectedly wipe out a lifetime of savings, limited liability protection is of paramount importance. The LLC, as well as the LP, offers even greater protections through the charging order procedure. Charging orders are too complex for this blog, but I highly recommend you contact Garret Sutton and ask for his assistance.
There are two different kinds of legal attacks I call burglaries and buffoons.
The first is an inside attack. An example of this would be if you own a rental property and a tenant or customer gets hurt on your property. They will sue the business or property, not you, the owner. If you handle your business properly, you will not have much in the bank to be stolen from you.
There is also an outside attack. This could be when you get in a car accident. Now, someone outside your investment or business is suing you. But, if done properly your entity corporation can protect you from that too. For example, your business probably owns the car you are driving. Now the business is going to get sued, not you.
These inner and outer attacks are very dangerous and not to be taken lightly. America is a very litigious society. Many of these lawsuits are exaggerated or false and filed just to steal money. You’ll be grateful for your corporate entity when that happens.
For centuries, the wealthy have used legal entities such as corporations. For a better explanation of how legal entities are used to protect the wealth of the wealthy, my legal advisor, Garrett Sutton, will take over.
Garrett Sutton explains how to better protect yourself with corporate entities
We don’t have to get too legal to know that investing and business ownership involves risk. When investing involves unlimited risk, the chance that out of the blue you’ll lose absolutely everything you own, fewer people will invest. But when you can hedge your bets and shield some of your assets, more people will put their money to work.
It started with corporate charters granted by the English Crown in the 1500s. The wealthy and well-connected were able to take risks that others could not, and the English economy flourished. In time, governments realized that limited-liability entities should offer an equal opportunity for protection. The fact that tax revenues greatly increased with such an expansion of rights certainly helped governments make the right decision.
Today, states such as Nevada, Wyoming, and Delaware provide favorable risk-protection laws and affordable fees, and generate huge sums of money for their treasuries. And, in one of the bigger win-wins out there, they allow investors to legally hedge their bets through state-chartered limited-liability entities which has allowed the economy to grow and more taxes to be collected. Much can be explained by examining self-interest.
Ironically, while providing for the good entity choices, governments also offer bad entity choices and don’t tell you which ones to use. The paternalistic nanny state so many complain of certainly had not come to entity selection. The government doesn’t teach it or warn about it, and they’ll let you make the wrong decision.
The bad entity choices, and the ones that offer no protection from claims and thus no minimization of risk, are sole proprietorships and general partnerships. You will not enter into businesses or protect your wealth with these entities. The rich learned this a long time ago. If your advisor advocates using a sole proprietorship or general partnership, do what the rich do: Move up to the next level. Get a new advisor who knows how to protect you.
Nevada has the best law on asset-protection trusts. Assets that have been in the trust for over two years cannot be reached by creditors, even with a court order.
While every situation is unique, I generally recommend an LLC. The LLC allows you to manage and protect the property. The asset-protection trust puts up an even bigger wall, protecting you as the beneficiary from creditors.
In setting up an asset-protection plan for clients, I am sometimes asked the question: Won’t the government or the IRS be suspicious of this?
My answer involves the history we discussed at the start. Governments encourage asset-protection planning. They allow for the charters, the laws, and the taxation. They want the rich and everyone else to invest and take risks. In turn, they gain significant tax revenue. So do what the government wants: Protect your assets.
Protect yourself the Rich Dad way
Protecting yourself through a corporation is simple. You begin by filing a document that creates an independent legal entity with a life of its own. It has its own name, business purpose, and tax identity with the IRS. As such, it— the corporation—is responsible for the activities of the business. In this way, the owners, or shareholders, are protected. And, in this way, many of the owners expenses can be paid and deducted by the corporate entity.
We live in a litigious society. Everybody wants a piece of your action. The rich hide much of their wealth using vehicles such as corporations and trusts to protect their assets from creditors. When someone sues a wealthy individual, they are often met with layers of legal protection and often find that the wealthy person actually owns nothing. They control everything, but own nothing. The poor and middle class try to own everything and lose it to the government or to fellow citizens who like to sue the rich.
If you own any kind of legitimate assets, I would consider finding out more about the benefits and protection offered by a corporation as soon as possible.
If you are not a business owner or invest and are an employee, then change that right now. Go out, right now, and start a business. Hire a lawyer to file the corporate papers for you. Start saving on taxes right now to protect yourself including your house, car, investments and more.
Your business does not have to make money to be granted these benefits. In fact, a business can lose money for many years making it a great write-off. I say this to get you motivated and to encourage you not to wait. But do not start a business as a way to trick the government. That would be stealing. Instead, take a moment, determine a business you want to start and begin the process. It’s easy and if done right, the tax and protection benefits are practically immediate.