Rich Dad’s ADVISORS™ My poor dad often said, “What you know is important.” My rich dad said, “If you want to be rich,who you know is more important thanwhat you know.” Rich dad explained further, saying, “Business and investing is a team sport. The average investor or small-business person loses financially because they do not have a team. Instead of a team, they act as individuals who are trampled by very smart teams.” That is why the Rich Dad’s Advisors book series was born. Rich Dad’s Advisors will guide you to help you know who to look for and what questions to ask so you can go out and gather your own great team of advisors. Robert T. Kiyosaki Author of theNew York Times Bestsellers Rich Dad Poor Dad™ Rich Dad’s CASHFLOW Quadrant™ Rich Dad’s Guide to Investing™and Rich Dad’s Rich Kid Smart Kid™ Page 1 of 224 Own Your Own Corporation 2004-05-23 file://\\Marvin\changed\open_c-lit\the_clit\clit12\corp\Own_Corporation-body.html Rich Dad’s™Classics #1New York Times, #1Wall Street Journal, #1Business Week, #1Publishers Weekly, as well as aSan Francisco Chronicle andUSA Today bestseller. Also featured on the bestseller lists of Amazon.com, Amazon.com UK and Germany, E- trade.com,Sydney Morning Herald (Australia),Sun Herald (Australia),Business Review Weekly (Australia), Borders Books and Music (U.S. and Singapore), and Barnes & Noble.com. Wall Street Journal, New York Timesbusiness andBusiness Week bestseller. Also featured on the bestseller lists of theSydney Morning Herald (Australia),Sun Herald (Australia),Business Review Weekly (Australia), and Amazon.com, Barnes & Noble.com, Borders Books and Music (U.S. and Singapore). USA Today, Wall Street Journal, New York Timesbusiness,Business Week, andPublishers Weekly bestseller. Wall Street Journal, New York Times,andUSA Today bestseller. Page 2 of 224 Own Your Own Corporation 2004-05-23 file://\\Marvin\changed\open_c-lit\the_clit\clit12\corp\Own_Corporation-body.html Rich Dad’s Advisors™Series Rich Dad said, “Business and Investing is a team sport.” Each of us has a million-dollar idea in our head. The first step in turning your idea into millions, maybe even billions of dollars, is to protect that idea. Michael Lechter is an internationally known intellectual property attorney who is Robert Kiyosaki’s legal advisor on all his intellectual property matters. His book is simply written and is an important addition to any businessperson’s library. Loopholes of the Richis for the aspiring as well as the advanced business owner who is looking for better and smarter ways to legally pay less tax and protect his or her assets. It gives real solutions that will be easy to apply to your unique situation. Diane Kennedy offers over twenty years of experience in research, application, and creation of innovative tax solutions and is Robert Kiyosaki’s personal and corporate tax strategist. Your most important skill in business is your ability to communicate and sell! SalesDogs®is a highly educational, inspirational, and somewhat “irreverent” look at the world of sales, communications, and the different characters that occupy that world. All of us sell in one way or another. It is important for you to find your own unique style. Blair Singer is respected Page 3 of 224 Own Your Own Corporation 2004-05-23 file://\\Marvin\changed\open_c-lit\the_clit\clit12\corp\Own_Corporation-body.html internationally as an extraordinary trainer, speaker, and consultant in the fields of sales, communication, and management. Page 4 of 224 Own Your Own Corporation 2004-05-23 file://\\Marvin\changed\open_c-lit\the_clit\clit12\corp\Own_Corporation-body.html Rich Dad’s Advisors™Series Dolf de Roos is a real estate investor who bought his first property as an undergraduate student. After completing eight years of university education and earning a Ph.D. in electrical engineering, he was offered a job at $32,000 per year. The week before, he had completed a real estate deal worth $35,000. Consequently, he didn’t accept the job, and to this day, has never had one. Dolf willingly shares his enthusiasm for real estate, and has rattled cages in audiences in over sixteen countries. He passionately believes that the Deal of the Decade comes along about once a week. Own Your Own Corporationreveals the legal secrets and strategies that the rich have used for generations to run their businesses and protect their assets. Written in a clear and easily understandable style,Own Your Own Corporation provides the necessary knowledge to save thousands of dollars in taxes and protect your family assets from the attacks of creditors. Page 5 of 224 Own Your Own Corporation 2004-05-23 file://\\Marvin\changed\open_c-lit\the_clit\clit12\corp\Own_Corporation-body.html This publication is designed to educate and provide general information regarding the subject matter covered. However, laws and practices often vary from state to state and are subject to change. Because each factual situation is different, specific advice should be tailored to the particular circumstances. For this reason, the reader is advised to consult with his or her own advisor regarding that individual’s specific situation. The author has taken reasonable precautions in the preparation of this book and believes the facts presented in the book are accurate as of the date it was written. However, neither the author nor the publisher assume any responsibility for any errors or omissions. The author and publisher specifically disclaim any liability resulting from the use or application of the information contained in this book, and the information is not intended to serve as legal advice related to individual situations. Page 6 of 224 Own Your Own Corporation 2004-05-23 file://\\Marvin\changed\open_c-lit\the_clit\clit12\corp\Own_Corporation-body.html Acknowledgments This book is dedicated to my wonderful wife, Jenny, and our terrific kids, Teddy, Emily, and Sarah. Thank you for your understanding as this book was being written. I would like to thank Robert Paul Turner, Megan Hughes, Andrew Smetana, and Cammie Warburton for their invaluable assistance in the creation of this book. Special thanks are also extended to Robert Kiyosaki, Sharon Lechter, and Diane Kennedy for allowing me the opportunity to participate as a Rich Dad’s Advisor. And thanks to all my clients. Assisting you to reach your business, financial, and personal goals is a very satisfying activity. Page 7 of 224 Own Your Own Corporation 2004-05-23 file://\\Marvin\changed\open_c-lit\the_clit\clit12\corp\Own_Corporation-body.html Foreword by Robert Kiyosaki When I was ten years old and in the fifth grade, I began to read about the great explorers, such as Columbus, Magellan, Cortez, DaGama, Cook. I dreamed of someday traveling the world in a wooden ship, in search of treasures in unexplored lands. I read every book I could about their lives and adventures. In the fifth grade, I often had the highest scores on the tests and quizzes about the great explorers. “You read about the explorers who were successful,” said rich dad. “What about the explorers who failed?” Rich dad was helping me prepare for my final exam in the fifth grade. “The ones who failed?” I asked. “Yes, the ones who failed,” said rich dad. “In school they teach you about the successful explorers or the famous explorers. There were many more explorers who were not successful and not famous whom we have never heard about, nor will we ever hear about them.” “Why is studying about the explorers who failed so important?” I asked. “Because you need to know how the owners and the investors in those failed voyages protected themselves against the repercussions from such failures,” said rich dad. “Repercussions?” I asked. “What kind of repercussions?” “Such things as the loss of life,” said rich dad. “The owners and investors wanted to protect themselves and their fortunes from the families of the explorer and his crew in the event there was a loss of life on the voyage.” “You mean the men on the ship risked and sometimes lost their lives, and all the owners and investors on land wanted to do was protect themselves from losing money? That’s one of the repercussions you’re talking about?” Rich dad nodded his head. He then began to tell me about the Dutch East India Company and the British East India Company, two of the more powerful and famous corporations behind some of those explorers. Some of these corporations even had their own navy and army to control access to their nation’s overseas wealth. He told me how these corporations in many ways took over whole countries, such as New Zealand, Hawaii, Australia, Malaysia, Indonesia, South Africa, Page 8 of 224 Own Your Own Corporation 2004-05-23 file://\\Marvin\changed\open_c-lit\the_clit\clit12\corp\Own_Corporation-body.html and other parts of the world. One of those countries was one day to become the United States of America. Rich dad pointed out to me that the flag of the United States was originally the flag of the British East Company, reportedly modified by Betsy Ross. While England may have lost control over its colonies, the British East India Company simply changed its name—a simple d.b.a.—and kept on trading. The more rich dad told me about the corporations behind these great explorers and how they shaped world history, the more interested I became in global business and doing business through a corporation. When I was sixteen, I began applying for a congressional appointment to the U.S. Merchant Marine Academy, the federal military school that trains young men to sail ships of the merchant marine. Kings Point, which the school is also known as, continues to train young people to replace the great seafaring explorers. Only two students from Hawaii are admitted to this little known federal academy each year, so I felt fortunate to be accepted after passing rigorous exams and interviews. At age eighteen, I began sailing as a student onboard ships carrying cargo along the same trade routes established by Ferdinand Magellan and Captain James Cook. I quickly realized that although the early explorers are gone, some of those corporations rich dad talked about still exist today, and the U.S. government funds the education of these corporations’ leaders. I began to understand why rich dad told me years ago, “Don’t just study the explorer and his ships, study the power of the corporations behind the explorer and his ships.” 747 Replaces Cargo Ships Today I travel by 747 rather than by cargo ship. Although my mode of transportation has changed, I have heeded rich dad’s advice and learned my lessons well. Today I travel as a representative of several corporations—the difference is that I own those corporations rather than simply work for them. As I stated inRich Dad Poor Dad, my poor dad thought it was a good idea to be a good employee and climb the corporate ladder, while my rich dad said, “Don’t climb the corporate ladder, why not own the corporate ladder?” Rich dad also said, “The problem with climbing the corporate ladder is that when you look up, you see somebody’s big fat butt above you.” On a more serious note, he said, “The two main reasons you need to own your own corporation are for protection against law suits and against excessive taxes, yet there are many other reasons and other strategies. The point is, if you are serious about being rich and keeping your wealth, understanding corporations and other legal structures is an important part of your ongoing financial education.” Introducing Garrett Sutton I am pleased to introduce Garrett Sutton to you. Often in my classes, students ask me questions about corporations and legal structures. My standard reply is, “I did not go to law school and I am not an attorney, so I do not give advice on that subject. I suggest you do as I do: Find a good attorney and use him or her as your advisor on this very important subject.” I am pleased to introduce to you my advisor in these matters, Garrett Sutton. He is a pleasure to work with, and he is more than a great advisor, he is a great teacher. As rich dad said to me years ago, “If you are serious about being rich and keeping your wealth, understanding corporations and other legal structures is an important part of your ongoing financial education.” FREE AUDIO DOWNLOAD In each of our books we like to provide an audio interview as a bonus with additional insights. As a thank-you to you for reading this book, you may go to the Web site www.richdad.com/advisors. Page 9 of 224 Own Your Own Corporation 2004-05-23 file://\\Marvin\changed\open_c-lit\the_clit\clit12\corp\Own_Corporation-body.html Thank you for your interest in your financial education. Page 10 of 224 Own Your Own Corporation 2004-05-23 file://\\Marvin\changed\open_c-lit\the_clit\clit12\corp\Own_Corporation-body.html Introduction Congratulations. You are about to undertake a powerful and enlightening journey. By reading this book you will learn quickly and easily the legal secrets and strategies that the rich have used to run their businesses and protect their assets. In short order you will clearly understand exactly how certain entities—corporations, limited liability companies, and limited partnerships—can not only save you thousands and thousands of dollars in taxes but can also save your house and savings and family assets from the attacks of creditors. These are the same lessons that Robert Kiyosaki’s rich dad taught him. Own nothing and control everything. Use the techniques of the rich to improve your financial standing and protect your family. And above all, work smarter instead of harder. By the time you finish this book you will have the legal savvy of an experienced entrepreneur and the knowledge necessary to immediately implement your own custom legal strategy. Let’s begin . . . Page 11 of 224 Own Your Own Corporation 2004-05-23 file://\\Marvin\changed\open_c-lit\the_clit\clit12\corp\Own_Corporation-body.html Chapter 1 Your Entity Menu � C corporation � S corporation � Limited Liability Company (LLC) � Limited Partnership (LP) � General Partnership � Sole Proprietorship As legal business systems and traditions have developed over the last five hundred years, several structures for running a business have evolved. Each structure (or entity) has its own advantages and drawbacks, which we will explore. As a frame of reference for making your selection, it is important for you to clarify your strategy in this planning. The purpose of this chapter is for you to clearly understand and choose the best entity for your unique and specific purpose. To that end, the following checklist should be considered: 1. Protection of family assets and investments 2. Management control 3. Avoiding family disputes 4. Flexibility of decision making 5. Succession of children and other family members to management 6. The nature of the business to be operated 7. The nature of the asset to be held 8. The number of owners involved 9. Estate planning and gifting of assets 10. Who may legally obligate the business 11. Effect upon an owner’s death or departure 12. The need for start-up funding 13. Taxation 14. Privacy of ownership 15. Consolidation of assets and investments These and other issues will become apparent as we review your choices. And please note, your decision does not have to be made alone. It is recommended that these issues be discussed with your attorney, accountant, or other professional advisor. An individual well versed in these areas will provide excellent insight into which entity is right for you. Page 12 of 224 Own Your Own Corporation 2004-05-23 file://\\Marvin\changed\open_c-lit\the_clit\clit12\corp\Own_Corporation-body.html It is important to know that in entity selection one sizedoes not fit all. If your attorney or accountant suggests only one entity, a general partnership for example, for each and every business venture you have him or her review, you will want to question why they believe one entity fits all situations. Or you may want to seek out a new professional advisor. We will discuss which entities work well in various business and asset-holding scenarios. But before doing so, we must point out which entities do not work well in any situation. For as important as knowing which entity to use for running your business, protecting your assets, and limiting your liability is knowing which entity NOT to use. Bad Entities � Sole proprietorships � General partnerships In my legal practice I represent various businesses, from small and basic to large and complicated. I enjoy helping entrepreneurs and business owners make money, provide for their families and employees, and secure a stable future. I cannot do my job if a client insists on using a bad entity. Sole proprietorships and general partnerships provide no asset protection. One lawsuit against your business, and your house, savings, and personal assets can all be lost. Our first case is illustrative. Case No. 1—Johnny Johnny was a plumber. He had been at it for five years and was starting to succeed. His customers were satisfied with his work and the word of mouth for Johnny’s Ace Plumbing was good. While Johnny was a good plumber, he felt intimidated by legal matters. Lawyers and accountants were supposed to be smart, so the work they did must be difficult. When Johnny was a young boy his father had been unfairly treated by a lawyer. He remembered it to this day, and wanted nothing to do with them. So instead of consulting with a professional on how best to conduct his business, Johnny let his part-time bookkeeper select an entity off the menu. The results were disastrous. Johnny’s part-time bookkeeper knew only that forming a corporation required filing special documents with the state but did not know how to file them. He knew that a corporation needed to file a separate tax return but was not sure of the ins and outs of preparing one. And so he suggested Johnny use a sole proprietorship because he knew how to handle one and always suggested one for his clients. One size fits all. The problem was that a sole proprietorship provides absolutely no asset protection. By operating as a sole proprietorship Johnny has unlimited liability for the debts, claims, and obligations of the business. This unlimited liability meant that his house and savings and personal assets were exposed to the claims of others. Of course, as in all horror stories, a demon entered Johnny’s business. He had hired Damien as an employee to assist with his growing workload. Damien seemed like a decent guy and appeared to know the plumbing business. Johnny did not bother to do a background check on Damien. Johnny was new to the business world and not aware of the need to do so. After one week on the job, Damien assaulted one of Johnny’s customers while they were alone in her house. Without going into the sordid details, this woman was so severely traumatized by what Damien did to her in her own home that she and her family had to move away. Within three weeks of the incident Johnny’s business was sued. Because Johnny was a sole Page 13 of 224 Own Your Own Corporation 2004-05-23 file://\\Marvin\changed\open_c-lit\the_clit\clit12\corp\Own_Corporation-body.html proprietor, this meant thathe , and not the business itself, as with a corporation, was sued and had to defend himself. The lawyers suing for the woman did the background check of Damien that Johnny did not do. Damien was a recently released ex-convict with a history of sexual assaults. Johnny did not have the insurance to cover such a claim. The case went forward. The lawyers argued to a jury that Johnny’s business was irresponsible for failing to check up on Damien and was responsible for the consequences. They presented to the jury what was true—a business is vicariously liable, or responsible, for the acts of its employees. The jury was horrified by the whole case and awarded damages of $10 million. Johnny was wiped out. As a sole proprietor he was completely and personally responsible for every claim the business incurred. And he had attorneys with a one-third contingent interest in the collection of $10 million after him. Johnny lost his house, his savings, and his family. The stress of it all resulted in his wife divorcing him, obtaining custody of the children, and moving away. Johnny declared bankruptcy. He ended up a broken man despising lawyers and our legal system all the more. The irony, of course, is that by consulting with a lawyer and using the legal system tohis advantage, Johnny could have prevented the disastrous consequences that resulted from relying on a part-time bookkeeper with a one-size-fits-all mentality for entity selection. A competent lawyer would have told Johnny that there were risks—known and unknown—in running any business. To protect yourself from such risks you need to limit your liability by establishing a corporation or other good entity. A good entity is one that shields and protects your personal assets from business risk. A bad entity is one that provides you no protection whatsoever. By using a good entity Johnny could have used the legal system—which has evolved to encourage business activity and limit the liability of risk takers—to his advantage. Other Sole Proprietorship Disadvantages As if personal liability was not bad enough, there are two other disadvantages to using a sole proprietorship: � Sale.It is hard to sell a sole proprietorship, since its value is based on the owner and not the business. � Death.When a sole proprietor dies, the sole proprietorship terminates. The sole proprietor’s successors can only sell assets, not the business as a going concern. A general partnership is also a bad entity. In fact it is twice as bad as a sole proprietorship because you have twice the personal exposure: personal liability for your acts and your partners’ acts. This will be illustrated in Case No. 2 ahead. Whenever two or more persons agree to share profits and losses a partnership has been formed. Even if you never sign a partnership agreement, state law provides that under such circumstances you have formed a general partnership. Page 14 of 224 Own Your Own Corporation 2004-05-23 file://\\Marvin\changed\open_c-lit\the_clit\clit12\corp\Own_Corporation-body.html A written partnership agreement is not required by law. A handshake is acceptable for formation. In the event you do not sign a formal document, you will be subject to your state’s applicable partnership law. This may not be to your advantage, since such general rules rarely satisfy specific situations. As an example, most states provide that profits and losses are to be divided equally among the partners. If your oral understanding is that you are to receive 75 percent of the profits, state law and your handshake will not help you. You are better advised to prepare a written agreement addressing your rights and rewards. Unlike a sole proprietorship, in which only one individual may participate, by definition, a general partnership must consist of two or more people. You cannot have a one-person partnership. On the other hand, you may have as many partners as you want in a general partnership. This may sound like a blessing but it is actually a curse. The greatest drawback of a general partnership is that each partner is liable for the debts and obligations incurred by all the other general partners. While you may trust the one general partner you have not to improperly obligate the partnership, the more general partners you bring aboard the greater risk you run that someone will create serious problems. And remember, just as with a sole proprietorship, your personal assets are at risk in a general partnership. Your house and your life savings can be lost through the actions of your partner. While you may have had nothing to do with the decision that was made and you may have been five thousand miles away when it was made and you may have voiced your opposition to it when you found out it was made, you are still personally responsible for it as a general partner. As such, a general partnership is much riskier than a sole proprietorship. In a sole proprietorship, only the proprietor can bind the business. In a general partnership, any general partner—no matter how wise or, unfortunately, how ignorant—may obligate the business. By contrast, limited liability companies, limited partnerships, and corporations offer much greater protection. All of them offer owners limited personal liability for business debts and the acts of others. It should be noted that because of these unlimited risks the last thing you want to do is become a general partner of an enterprise in which you do not have day-to-day management control. If you do not thoroughly know what is going on in the company you should not put your future on the line as a general partner. Case No. 2—Louise Louise had worked for someone else all her life. For the last ten years she had worked in the gift section of a large department store. She did not like the floor manager insisting she do things a certain way when she knew her way would generate more sales for the company. It was all petty politics. She looked forward to the day when she could open her own business and make her own decisions. Then one day, Maxine came to work at the department store. The two of them hit it off immediately. Maxine had a certain style and attitude that appealed to Louise. They had similar interests, the same feel for what the customers wanted, and the same desire to escape working for a faceless corporation filled with narrow-minded managers who stifled their every idea for improvement. Soon they were talking about opening their own gift boutique. Louise had managed to save $10,000 to pursue her dream. Maxine did not have any money to contribute, but convinced Louise that she would contribute her first $5,000 in profits back into the business. Louise was not aware that by agreeing to form a partnership with Maxine without getting a written agreement as to distributions meant that they were automatically 50-50 partners. While Louise put up all the money and Maxine orally agreed to put her profits back later, the law treated them as each owning 50 percent of their new business, L & M Gifts. Page 15 of 224 Own Your Own Corporation 2004-05-23 file://\\Marvin\changed\open_c-lit\the_clit\clit12\corp\Own_Corporation-body.html