White Paper

The “Triple Threat” LP™

Convert Your Business Structure into a

W.T.D.™

(Weapon of Tax Destruction™)

The Most Powerful Business StructureOn the Planet

Dear Prospective Client—

The purpose of this “White Paper” is to expose small business owners to some of the clever tax & asset protection strategies utilized by the top 10% wealthiest Americans. I refer to these as “underground” strategies because they are not advertised anywhere in the public domain, and in all likelihood, your CPA is not aware of them either.

You might be surprised to learn that the old-fashioned “Limited Partnership” is the secret weapon used by the wealthy to significantly reduce their federal income tax liability and to protect & preserve their wealth. As discussed in this paper, the Limited Partnership (designated “Ltd.” or “LP”) provides unusual tax and asset protection advantages that cannot be duplicated by any other business entity type. A Limited Partnership is a business structure you can utilize throughout your lifetime (as long as you have self-employment income), and can eventually be used as a valuable estate planning tool to distribute your estate tax free to the next generation without going through the probate process. If your spouse is also self-employed, you can double the savings.

Regardless of your current business structure, restructuring your business as a Limited Partnership is a simple process and can be accomplished within 5-7 days. As discussed below, the Limited Partnership helps you build long term wealth by generating significant annual tax savings (which can be invested elsewhere), in addition to protecting your assets from the reach of creditors. Lawsuits & high tax rates are the two primary impediments to long term wealth accumulation.

Once your Limited Partnership has been set up, we will provide you with ongoing support and will answer all of your questions about how to use the structure properly—free of charge.

We also offer an initial 2 hour consultation free of charge. Please contact me at (713) 569-2725, or by email at adam@potterlaw.guru.

Regards,

Adam L. Potter, Esq.

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ADAM L. POTTER, ESQ.Business & Tax Attorney

The “Triple Threat” LP™

“The Most Flexible, Tax Efficient &Creditor-Proof Structure Available, Period.”

The Triple Threat LPTM Structure designed by Potter Law LLLP, is the most flexible, most powerful business structure you can get for your closely held business.

I know what you are thinking. Isn’t a 3 entity business structure a little over the top for an individual or small business owner? Not at all. I teach my clients to think of business entities as simply “incorporated bank accounts.”

If you can simultaneously handle three separate checking accounts, then you will have no problem operating the Triple Threat LPTM.

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Eliminates FICA & Medicare Tax

Operates with 3 Checking Accounts Combines all 3 Entity Types

Operating CompanyManagement CompanyGENERAL PARTNER

Holding Company

Rich Tax Code – Poor Tax Code

As has been portrayed by the media, there are indeed two different tax codes that apply to Americans in this country. The “Rich Tax Code,” which is available to the top 10% wealthiest Americans who can afford high priced tax attorneys who know precisely how to exploit the tax code.

The other 90% of Americans are subject to the more oppressive “Poor Tax Code.” Those who are subject to the Poor Tax Code are largely oblivious to the existence of a second more favorable “Rich Tax Code.”

The following discussion explains some of the major differences between the Poor Tax Code and the Rich Tax Code, and how to tell which tax code is being utilized by your tax advisor.

The Poor Tax Code

Being subject to the Poor Tax Code, among other calamities, means that most or all of your income is subject to FICA & Medicare taxes, which combined, is 15.3% tax. For someone who earns $100,000, that means they are throwing $15,300 or more per year out the window. Those in the Poor Tax Code end up paying the 15.3% tax over their entire working lives, even though legally, they are only required under federal law to pay into Social Security & Medicare for 10 years to permanently qualify for those benefits.

FACT: The significant overpayment of FICA & Medicare taxes over a 20-30 year period is what separates the middle class from the wealthy. One of the keys to building wealth is by managing your Social Security account like you would any other investment.

KEY: The key to smart Social Security planning, is to qualify for Social Security retirement benefits (which requires 40 quarters or 10 years of employment), and once qualified, you cease any further payment of FICA & Medicare. If you then reinvest the tax savings every year, you will have created a sizeable nest egg paid for by the U.S. Government.

W-2 Employees.

If you receive the majority of your income via a Form W-2 (i.e., you are an employee), you are literally stuck in the middle of the Poor Tax Code. W-2 status is a death sentence when it comes to

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FICA & Medicare taxes. As a W-2 employee, your employer must withheld federal income taxes for each pay period, including FICA & Medicare taxes. Once the income has been taxed, you lose the ability to change the character or nature of that income.

1099 Independent Contractors.

Like W-2 employees, independent contractors who receive their income via a Form 1099, you too are likely stuck in the Poor Tax Code, but unlike W-2 employees, you have a way out. 1099 Contractors retain the ability to change the character or nature of their income before they pay taxes on it, and before it is reported on their personal Form 1040. That is because independent contractors are paid in a “gross” amount without any withholding of federal income taxes. Because no taxes are taken out of a 1099 Contractor’s paycheck, there are still opportunities to change the character or nature of the otherwise 1099 income classification, to a type of income not subject to FICA & Medicare.

Business Owners with LLCs or S Corporations.

For those of you conducting your business through an LLC or an S Corporation, your tax advisor has probably signed you up for a lifetime subscription to the “Poor Tax Code.” If your tax advisor has you in an S Corporation, your subscription comes with a much higher audit risk, than with a regular LLC.

LLC and S Corporation income receives the same tax treatment as 1099 income. In other words, this means all of their income is typically subject to the 15.3% FICA & Medicare tax. The only difference, is that LLC and S Corporation owners receive either a Form K-1 or Form W-2, or both. Like 1099 Contractors, business owners using LLCs and S Corporations have a way out. Most business owners just don’t know it.

How do you know if you are in the Poor Tax Code?

You know you are in the Poor Tax Code if you or your tax preparer’s primary focus is on your personal tax return, Form 1040. In other words, your tax advisor’s focus is on employing tax strategies AFTER your income has hit your personal tax return.

EXAMPLES INCLUDE:

(a) Earned Income Credit,(b) Child Care Credit,(c) Schedule A—Itemized Deductions,(d) Schedule C—Business Expenses,(e) Home Office Deduction, and

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(f) Annual contributions to an IRA.

Do any of these sound familiar?Although deductions (a), (b), (c) and (f) above are legitimate credits and deductions, reporting your small business activity on Schedule C is begging for an IRS audit. Additionally, the IRS loves to use the Home Office Deduction as an audit trigger, where changes are, they know they will find additional transgressions. For these reasons, those that subscribe to the Rich Tax Code never claim these expenses on their tax returns. They also never claim mileage deductions, or meals and entertainment.

In fact, it is amazing how simple and clean the tax returns are for Rich Tax Code taxpayers.

The Rich Tax CodeIn contrast to the Poor Tax Code, which focuses on your personal tax return for any deductions, the Rich Tax Code focus instead on changing the character or nature of their income BEFORE it hits their personal tax return. How on Earth do they do that, you might ask?

Two words: Limited Partnerships.

The wealthy design their entire business and personal wealth around Limited Partnerships. Donald Trump, Mitt Romney, New Gingrich, Ross Perot, and T. Boone Pickens all utilize Limited Partnerships to build and protect their business & personal wealth.

In addition to being used to operate businesses and business ventures, the Limited Partnership can be converted to a “Family Limited Partnership” or “FLP” later in life. The FLP is one of the most powerful estate planning and succession tool on the planet.

What is so special about a Limited Partnership?

For 1099 Contractors and small business owners, the most significant feature of the Limited Partnership structure, is the ability to completely eliminate FICA & Medicare taxes. Only the Limited Partnership is exempt from FICA & Medicare taxes.

Restructuring to a Limited Partnership will therefore save you $15,300 on $100,000 in annual income. The savings increases to $27,000 on $200,000 in annual income.

Eliminating FICA & Medicare is just one of over a dozen tax saving strategies that can be implemented with a Limited Partnership. More specifically, the “limited partner” is the only business owner classification type under the Tax Code that is expressly exempt from FICA & Medicare taxes. In simple terms, that means if you earn $100,000, by paying yourself through a

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Owner Compensation

Smith saves $20,000 per year in FICA/Medicare

Limited Partnership (as opposed to an LLC, S Corporation, or 1099) you save $15,300 per year, every year.

Savings on FICA & Medicare is but one of the many tax advantages of a Limited Partnership. Another interesting feature of the modern Limited Partnership structure is that it comes with a second business entity (a regular corporation) to serve as “General Partner” (the managing partner) of the Limited Partnership. This allows single business owners to form a Limited Partnership even if they don’t have a “partner.”

Beginner’s Limited Partnership Structure:

FICTIONAL SCENARIO: THE 1099 INDEPENDENT CONTRACTOR:

John Smith works in the oil & gas industry as Landman negotiating leases. Smith works for SUNDOWNER LLC as an independent contractor. At the end of the year, his employer issues Smith a 1099. Smith earned $130,000 for tax year 2016. Smith has never thought of himself as a “business owner” per se. After all, he has no employees of his own, nor does he advertise, or do business under a business name. Smith reports his 1099 income on Schedule C of his personal tax return. In 2016, Smith paid $19,500 in FICA & Medicare taxes alone.

RECOMMENDATION: Smith should set up a beginner’s Limited Partnership structure. Smith will then need to direct his employer to pay Smith’s Limited Partnership—“SMITH LAND SERVICES, LP,” instead of issuing a paycheck to Smith personally. Once the income is paid into the Limited Partnership’s bank account, Smith can then transfer the funds from the Limited Partnership account to his personal bank account. No FICA & Medicare taxes are taken out of the payment from the Limited Partnership to Smith personally.

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SMITHLAND SERVICES

LP

John SmithSOLE SHAREHOLDER

SLMANAGEMENT

INC

2 Partners

General Partner Limited Partner

100%

John SmithLIMITED PARTNER

98%2%

John SmithPRESIDENT

Operating Company

JOHN SMITH, LANDMAN

$

PrimaryVehicleExpense

$

1099 IncomeExpenses

The Triple Threat LP

Above, we discussed the basic 2-entity beginner’s Limited Partnership structure, which is comprised of a Limited Partnership along with a Corporation to act as the General Partner. Eventually, business owners begin to expand into other business ventures, or they begin to acquire assets such as rental properties. It is at this point the business owner will begin to add LLCs to the Limited Partnership structure. LLCs are used like “baskets” to separate assets and business ventures.

The Triple Threat LP thus includes three entity types: 1) Corporation, 2) Limited Partnership, and 3) LLCs. In order to give you a visual of each entity’s role, I like to use the analogy of the container company—PODS®

THE PODS® ANALOGY:

BRIEF EXPLANATION:

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John SmithPresident

Management Company INC Holding Company LP

Operating Co. LLC

Rental Property LLC

Owner Compensation

The business owner controls the Management Company in his capacity as an officer and director, and further as owner of 100% of the common stock. The Management Company, in turn, controls and manages the Holding Company, AND all the LLCs owned by the Holding Company. Going forward the business owner need only form additional LLCs for each new asset acquired or for each new business venture.

Diagram of the Triple Threat LP

Continuing with the SMITH LANDSCAPING example, the following depicts how Mr. Smith would utilize the Triple Threat LP:

Don’t let the complexity fool you. Mr. Smith can operate the above structure easily and efficiently via 4 Bank Accounts. More significant is that 90% of all business transactions will occur in the

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SMITHLANDSCAPING

LP

John SmithSOLE SHAREHOLDER

SLMANAGEMENT

INC

2 Partners

General Partner Limited Partner

100%

John SmithLIMITED PARTNER

98%2%

John SmithPRESIDENT

Holding Company

SMITH LANDSCAPING

SL OPERATIONSLLC

SL EQUIPMENTLLC

Management Company

Operating Company

100% 100%

Owns CompanyVehicles & Equip.

1099 Contractors

Revenue Expenses$

$

operating LLC (SL Operations LLC in the above example). The other 3 entities will have little activity.

Note that for liability protection, all employees and independent contractors are assigned to the Management Company, which has little capitalization. The LLCs serve two purposes: 1) liability protection (through separating or isolating businesses and assets from each other), and 2) reducing your IRS Audit risk, because the LLCs do not have to file tax returns.

I showed this to my CPA and he said “It won’t work.”

Don’t panic. About 50% of the CPAs who review my structure say it won’t work, or they say it will get you audited by the IRS. When this happens, I typically respond as follows:

FIRST: I refer the CPA to the Hierarchy of Tax Professionals (reproduced below). Then I ask the CPA how many Limited Partnership structures have they set up? The answer will always be “none.” If you haven’t even tried to set one up, how can you say it won’t work?

SECOND: I ask the CPA to provide me with a single U.S. Tax Court decision where the Court reclassified distributions made to limited partners, which are not subject to FICA & Medicare. Your CPA will be unable to provide you with a single court decision, period.

THIRD: I refer the CPA to the only U.S. Tax Court decision in existence that upheld the tax treatment of a wealthy taxpayer who paid himself compensation in the amount of $18 million in the form of limited partner distributions, all of which, he claimed, was not subject to FICA & Medicare taxes. The case is Frank G. Sands, Jr. v. the Commission. Mr. Sands Limited Partnership structure saved him $500,000 in FICA & Medicare taxes.

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*Only 1% of Tax Professionals achieve Level 8

FOURTH: I tell the CPA to “chill out.” I’m not trying to steal his or her clients. In fact, they CPAs billings will only increase when a client restructures as a Limited Partnership, because there will be more tax returns to prepare and file

If you don’t believe your CPA would fail to advise you there are strategies using Limited Partnerships that could save you a significant amount of money, I invite you to pick up a copy of Mark J. Kohler’s book “What Your CPA Isn’t Telling You.” Mark J. Kohler is a well-known JD/CPA and author who focuses on advising small business owners.

END OF WHITE PAPER

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