Keeping More of What You Make

Part 3 - Incorporating your business.

Instructors:

Garrett Gunderson

Garrett Gunderson

Garrett B. Gunderson is a financial advocate to dentists.  Through the value of Soul Purpose, he empowers people to build sustainable wealth consistent with their passion, purpose and knowledge. Last year, his firm saved doctors over 7,800,000 dollars in recovered cash through his Financial FastTrack program.

Garrett reviews the three different types of corporations; LLC, C-Corp and S-Corp.

All right so we've talked about taxes here and part of that I started to mention corporations. There are several types of corporation but there are three primary types of corporations that you need to understand. No. 1 is LLC Limited Liability Company, no. 2 is an S Corp and no. 3 is a C Corp. I know there are general partnerships and limited partnerships and family limited partnerships and those are all in the peripheral. I'm talking about the major categories here. Okay. So first off LLC. An LLC is basically the one with the least president. It's the newest. It's not quite viewed in the business world as solid as the company as maybe an S or C Corp but nonetheless it's still considered a corporation. These are best when you want flexibility. When you got multiple partnerships and you want to distribute different amount or discriminate that way. An LLC is best. And S Corp on the other hand is really a cash cow. If you're going to have a business that you're going to pull as money out of it as possible and you want to pay the least tax an S Corp is best for an individual more so than a partnership. And the C Corp that's really kind of the big boy. That's kind of the real business there. And if you're going retain earnings and you're going to have multiple partners but you're going to distribute different types of stocks and have investors, a C Corp is probably the most powerful. I'd say the most common type is the professional S Corp for most dentists. So the type of corporation you choose impacts your taxes. See a C Corp you paid tax on the way in as a corporate tax and you also pay tax on the way out. But retain earnings might be able to not have to pay tax immediately where an S Corp whatever you earn whether it's in the business or your pocket you always pay the taxes on that under current law. So the type of corporation you have definitely impacts and that's part of the money tips here. I've given you the tax strategy around an S Corp. And I'm not an accountant so you want to talk to your accountant. I'm a financial advocate. I just happen to be around these things, learning about these things and I'm giving you the overall picture or where you might be able to plug some leaks. So this is the biggest leaks and this is a fun one because I'm not a big fun of budgeting and constraining. I hear gurus all the time talking about live within your means, live within your means. And look for you when you hear that, I don't feel like me but I hear that as reduce expenses, reduce expenses. That doesn't sound exciting. Cause expenses mean date night, travel, hiring people for my business, buying clothes. You know those are all expenses and heck without expenses how do we really enjoy money. Cause I know the word expense kind of has a negative connotation. But take expense out, what good is money. Expense is how we exchange. So when I say live within your means. I would say it this way. Continually expand your means. Continually find ways to produce more and therefore have more cash flow. So we're talking about optimizing cash flow not just constraining. And I'm going to give you a strategy called the cash flow index. This is a proprietary thing that we've created and it let you know what loans to pay first and which ones to pay the minimum off. All you got to do is you take and you list every loan you have whether it's a home, cars, signature, business loan, student loan and you divide it by the monthly payment. This gives you a number. Low numbers are bad in this. If have a low cash flow index which is for sure anything under 50 it means you got to cash hog there. You got balance that's taking a big payment. That's bad on your debt-to-income which we talk about in credit but t's even worst on your pocket book, right, cause a lot of money is going towards it. So if you're just paying extra here and there to all your loans what you're going to do is stop paying extra and pay the minimum to everything other than the one with the low cash flow index and allocate all your extra resources that's going towards only to the one with the low cash flow index because here's what happens. You're going to pay that off quicker. It's going to free up more cash flow and you can allocate that to the next one. Now if you really want to think production mindset, pay the minimum to everything. Find one area of your business where you could increase cash flow, take the dollars, put it to the business first then turnaround and put it towards the one with the low cash flow index and that's how you really accelerate paying off your debt which is a little delay. You keep your money in motion. Don't just have your dollar do one thing. Keep that money in motion. So the second piece to cash flow. If you got investment that you don't think area going earn well or have it earn well and you don't know what rate the return they would be and why it would become that rate of return. And it's always variable and volatile like the stock market but you got loans that are 10, 12, 14, 16 high interest rates. It may make sense to stop funding a retirement thing or even use cash that you have set aside to pay off those interest rates that are guarantee to cost you that money. That's a pretty big rate or return if you can pay off something that's a 16% cost. There are not many guaranteed things out there in the world that are going to pay you 16 but this guaranteed cost and now you freed up that cash flow to do something else with which might accelerate paying off other debt. It might be more money that you could now use to start investing or put things into your business or whatever it may be you just have to look. Earning 8 and paying 16 is a pretty big difference. You got to look at this comprehensively and as a picture. And that's a big piece of cash flow. Let me give you another tip and this will work for some of you but not for everyone but it's worth everyone checking out. It's called the streamline refinance. What I mean by streamline refinance is you call up your existing lender. And after you've improved your credit score, you say you know what interest rates are really low, I'm wondering if I could talk to your department that does refinance or restructure of loan. And what you want to talk to them about is the streamline is because no. 1 you don't have to pay full closing cost. No. 2, you don't have to get a full appraisal. No. 3, you don't have to take 30-60+ days to do the refinance. They just have you sign one form, pay one small fee and lower your interest rate in order to keep your business because interest rates are lower. And when you have a good credit score and you're on time payer, we see this happen about one in five times that they let you do it. We just talked to a dentist and he talked about Dr. Jason where he called in. He got $750 a month off. I'm only sharing it on camera because he shared it on camera at my event. But just do the streamline. He thought that didn't sound like they would do it. Made the call and it happened. The other piece on this cash flow is its time to start talking to your credit card companies or anyone else you have a loan with and start saying hey there are other bills out there. What bill d you guys have. Cause if you can't beat my current rate I think I might need to cancel. When you use the word cancel you go to the right department cause it's kind of a magic word and now all the sudden you have the opportunity to actually save a whole bunch of money. That's another cool cash flow strategy. Think of your expenses into three categories. No. 1 is destructive expenses. A destructive expensive I think is always heroine. Heroine always seems to be destructive expense. You know get rid of it. But consumptive expense is the second type of expenses. These are like trip to Hawaii, big screen TVs. They're consumptive expenses. I wouldn't say eliminate them I'd say just always pay cash for those types of things. Then there are productive expenses, right. A productive expense is an employee. This program right here that you're paying for. You're getting C credits. You're getting new knowledge. You can go apply this in your business. It's an expensive but if you get rid of it you lose production. It pays for itself and then some as long as you use it. That's a productive expense. I say you always look to increase those types of expenses where a lot of dentist have been taught to be so frugal, they eliminate some of these great things in their life that limit them on their education or access to information that's going allow them to improve their practice and themselves personally. So start categorizing your expenses into three categories. Eliminate the destructive, pay cash for the consumptive and always increase the productive expenses. I know that that's something you probably never heard the word expenses and production in the same title. But you know it's pretty simple. You have good employee. Your best employee is worth the money because they product more for you and the firm than what they cost. A bad employee that's destructive expense because they create more chaos and strain on your mind than any value they create. So it's all about context there as well. All right. Let's move on to the next section and we're going to talk a little bit about investment. So when I used the word investing I guess we have to kind of ask is it investing or gambling. I mean if you're putting your money in something that's nameless, faceless, you've never been in the board room, you don't know what stocks you hold. You don't know much about it. You're just trusting the advisor who is probably is a salesperson by the way. Is that really investing? Because I felt like a lot of real estate and stock market stuff has been gambling for a lot of people. Because they don't know what would work or what the exit strategy is or what the value proposition meaning not only how they win but how the market plays wins from those dollars and where it's being invested. So I want you to really consider that when it comes to your money. Now if you got your money in qualified plans. I want to let you know that there are things called self-directed IRA which open up the entire world of investing to you. Not just a few mutual funds or few stocks or bonds but it lets you invest in about anything. Other than maybe artwork and life insurance and certain companies you control and there are certain companies out there that have full disclosure on what the fee is and it's just a fee for the account versus all the additional fees that can come into these programs. So that's important. No. 2 there's something called a 72T. Now most people haven't heard of this but it's by the IRS. The 72T says if you're before 59-1/2, you could actually start taking payments out of your retirement plans without penalty. So you can avoid the 10% they called it substantially equal payment for a minimum of five years or until age 59-1/2 whichever is greater. But it's actually a strategy to start getting your money in motion rather than having it stagnant in just one account, have the cash flow come in, start to manage what the taxes are going to be over time. I just want to let you know that there are these kind of options out there but most important there are accounts that have less fee and you can even get a checkbook towards that account so you can invest more quickly and not always have to go through a broker. And why do they call most financial people broker? I figure cause it's because they're broker than you are in reality. I mean come on. No. 1 when I got my test pass for being a registered investment adviser, I was watching NBA basketball on a Sunday reading through a book and took the test Monday morning and pass. You guys went to undergraduate, graduate, I mean you spent a lot of time getting educated and then you got financial people that aren't that educated typically handling finances and that's part of the reason why I think 92% to 98% of dentist never get a chance to retire. Well because not of lack of effort. Not necessarily a lack of earnings but I think it's a broken financial system where they're saying hey we're going to give you financial freedom. But how is a financial freedom just handing your money over to them and they're going to handle it for you. If you don't know how it's working is that freedom. And ultimately here's the scary thing. When people get to retirement USA Today did a poll. The no. 1 fear of retiree is the fear of running out of money. So this dream of us all on the beach, hand in hand, traveling, spending time with family, all the things that you're giving up today because they're not about you living wealthy today they're about you handing your money over. And then you get there and then no. 1 fears running out of money. Well you become a slave to three factors. No. 1 if taxes go up in retirement your income goes down because you're on living off interest. No. 2 if interest rates go down, you have your income go down. That's a scary place to be and I hope you don't have to watch CNBC to find out what interest rates are going on every day because I was on the CNBC Squawk on the Street program and I was bored to death watching the preview just before I got on to do the interview. That's not the way I want to live my retirement. And then the third piece is inflation. You probably heard they're printing a lot of dollars these days. That's [stilt tax] that starts to eat way as time goes on. So make sure that you don't have your entire retirement based upon an interest only scenario out of your control. And I think it's interesting because they're telling dentists sell your business live off whatever investment. If you sell your business for less than a year's revenue, your entire life's worth less than a year's revenue and you have some influence and some control and capacity, you have a best tax shelter which is your company and now you're going to retirement and give your money to someone else. That's why people are not happy in retirement and that's a big problem of why most dentists are not prepared. So that's not going to put money in your pocket. It's just going to save you a lot of heartache and grief in your whole life if you can really understand there's a better situation. Retire the concept of retirement and start living more wealthy today. What do you want to do today? Trips. Time away from the office. Start building the practice to operate independently of you so it's not a 100% reliant upon you, that's the better retirement vehicle. Retire from the things you hate by hiring people that love to do those things that you hate to do. Find the focus that you're best at and the highest leverageable activity in your business. You heard this over and over. But I'm a financial guy giving you permission to do it as well.