Hello, my friends, and welcome to another episode of Passive Real Estate Investing, and I’m your host, Marco Santarelli. I’m always glad when you tune in and listen to our episodes. Well, today’s episode impacts pretty much everybody, so listen through to the end. It’s not something that you want to miss. Now it, granted, it doesn’t sound like an exciting episode topic when we’re talking about legislation and the Corporate Transparency Act, but this is something you definitely need to know, not just want to know. Well, so what is it? What, what is the Corporate Transparency Act? Basically, it’s an act that was enacted in the United States to address the issue of money laundering. It’s also there to address terrorist financing and other illicit activities by requiring certain companies to disclose their beneficial ownership to the Financial Crimes enforcement networks. It’s a government body, also known as F-I-N-C-E-N.
But the primary aim of the CTA or the Corporate Transparency Act is to enhance transparency in combat financial crimes. But it also has implications for real estate investors. And this is why I want you to pay attention to today’s episode and really understand what it’s for and why it’s there and why you need to comply and report. Because the fees, I shouldn’t call ’em fees. The penalties are pretty large and pretty stiff. And you know, my guest today, Ted Sutton, will explain what those are. And when I heard them, I didn’t know what they were when I heard them, I thought, oh my gosh. I mean, that’s pretty serious and pretty excessive. So it’s not something you wanna fool around with. But real estate investments, you know, have often been utilized as a means to launder money because of its high value and the relative ease of transferring ownership with real estate.
So with the CTA in place real estate investors like me and you, particularly those who are operating through corporate structures such as limited liability companies and whatnot, you know, may be subject to the increased scrutiny of this act and the reporting requirements. And let me tell you right now, before you even listen to this interview, it probably and most likely does affect you. So yes, you are chalked into this circle.
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So, on that note, let’s dive right into my interview with Ted and I think you’re gonna get a lot out of today’s episode. Well, it’s my pleasure to welcome Ted Sutton to the show. He is a licensed attorney who is the son of bestselling author, and the Rich Dad advisor, Garrett Sutton, who by the way, has been on our show multiple times over the years. Ted Works for Corporate Direct and Sutton Law Center. He specializes in the area of business formation and compliance with the Corporate Transparency Act, which is something we’re gonna talk about here today because most investors don’t really know about it or what to do with it. And he’s also the author of Five Tricks to Teach Your Kids about Money, which you can download for free. And we’re gonna give you that link in a little bit just later in the episode. With that, Ted, welcome to the show.
Yeah well, thanks for having me on, Marco.
It’s great to have you on. It’s interesting. I’ve had your, your father on multiple times over the years and I knew of you, but I never really had you on the show. And so this is a first. So welcome.
Yep. Thank you for that. And it’s nice because my dad is not here to hold my hand through it, so, you know, it’s definitely <laugh> sort of a coming out in a way.
So no, this is great. This is great. I’m honored to have you on. So, you know, let’s start off with you. I mean, I gave a kind of a brief introduction. People are pretty familiar with your dad, you know, having authored multiple books, being one of the Rich Dad advisors with Robert Kiyosaki and all that good stuff. And, you know, now it seems like you’re kind of following in his footsteps. Tell us a little bit more about you so we have you know, some more color about who Ted is and what he’s all about.
Definitely. So, yeah, I intentionally placed a book right there. You know, it says Loopholes of Real Estate. It’s my dad’s book in the Rich Dad series. But about me, you know, I was born and raised in Reno, Nevada. I went to college at the University of Utah. And believe it or not, I actually got a degree in mining engineering, but I worked at a mine in Chile the year before I graduated. And I did have a really great experience. Like I met a lot of cool people. I got to work in a mine in the, in the middle of the Atacama Desert for three months <laugh>. So really good opportunity, you know, I got to meet people I otherwise wouldn’t have met. But deep down I kind of knew that this wasn’t the career path that I wanted. So after I graduated, I sat down with my parents, we decided it would be best for me to go to law school.
So I took a year off, went to the University of Wyoming for law school. You know, graduated there, took two bar exams, Wyoming and Nevada. And now I’m working with my dad full time. And you know, it’s been a really good experience. He’s a really great mentor, you know, and a lot of it is like drinking from a fire hose ’cause he knows so much. But you know, overall it’s been a really good experience. I have a really good relationship with him. And yeah. And now I’ve gotten to, you know, ever since I graduated, this Corporate Transparency Act has been looming and it just took effect on January 1st. So I’ve kind of dug into the weeds there and a lot of my legal career’s just been focused on that.
Right. Very cool. Didn’t know that’s what you took and you were working in a mine that’s very interesting and so different than law.
<Laugh>. Oh, definitely.
But that’s a good segue with the corporate Transparency Act, which is, you know, something that I want to talk to you about. Investors really don’t know much about it. It’s a relatively new legislation, and as you said, it went into effect January 1st of this year. It did, yeah. So, you know, the most basic of questions, what is the Corporate Transparency Act?
Yeah, so the Corporate Transparency Act is a new federal disclosure law, and it requires small businesses to report information to the federal government. You know, when you set up an LLC, you file the articles of organization with the Secretary of State. So corporate law and business formations mainly been a state thing. But what’s interesting about the Corporate Transparency Act is that it requires businesses to now report information to the federal government. And there’s this branch of the US Department of Treasury, it’s called fen, which stands for Financial Crimes Enforcement Network. And they’re the ones that are tasked with creating a database. Businesses can report information to it. And the scary thing is, is if you don’t report this information, you can face some very steep penalties and they include up to $10,000 in fines or two years in jail. So this is a really serious law. Nobody’s talking about it. So, you know, I commend you for bringing me on to talk about it on your podcast. ’cause There’s a lot of small business owners out there and real estate investors who just don’t know about it.
Yeah, that’s kind of scary when you think about it considering how many people don’t actually know about it, and the fines and penalties are pretty steep. So, I mean, I’m sitting here thinking about it and I’m thinking, geez, that’s kind of scary. Maybe I should you know, review all my corporate entities and make sure that I’m disclosing what needs to be disclosed. So, I mean, that begs the question, you know, what, what are the disclosure requirements for, I wanna say investors because, you know, we, we we’re talking to real estate investors for the most part, but we also have business owners and entrepreneurs that listen to the show. So I, I guess let’s just make it a general question. What are the disclosure requirements for people who own businesses and have entities?
Yeah, and that, that’s a really great question. So there’s three pieces of information that business owners and LLC owners need to report. The first piece of information is the reporting company information, and the reporting companies, any company that’s created when you file a document with the Secretary of State. So this is, you know, LLPs LLCs, limited partnerships, corporations, things of that nature. So you need to report information about the company. That’s the first piece. The second piece is the beneficial ownership information. So a beneficial owner is, you know, somebody who owns a piece of the company. And this is someone who either owns 25% or more of the company, or they exercise substantial control of the company. So they have some sort of management powers. So, you know, if you’re a beneficial owner, you’re gonna need to report your name, your address, you know, a passport or a driver’s license.
So you’re gonna need to report that. And then the third piece of information is reporting company information, or excuse me company applicant information. So a company applicant’s, the person who sets up the company or directs the company’s creation. So, you know, we here at Corporate Direct would be the company applicant’s. And so, you know, it’s the person’s name, date of birth, a driver’s license, or a passport. So, you know, these requirements are, it may sound simple, but they can be pretty onerous because the database is new and there’s a lot of little pieces of information that you need to report. But yeah, those are the three main pieces that you need. It’s reporting company, beneficial Owner and company applicant.
So, I don’t know if you touched upon this, but I’m thinking who should and who shouldn’t be disclosing beneficial ownership? I mean, is it, does this apply to everybody across the board or is it only certain businesses and entities that check certain boxes that need to report and submit this information? Yeah,
Yeah, and that’s a really great question. So, you know, the reporting companies, the company set up with the Secretary of State, but there are 23 exemptions to the reporting company requirement. The first is for large operating companies. Now, I should mention that this law is very unique because when the federal government makes, you know, passes similar legislation, they’re going after the big companies. But what’s interesting about the Corporate Transparency Act is that it targets the smaller companies. So if you meet the large operating company exemption, then you’re exempt from reporting. And a large operating company is a company that employs 21 or more employees. It has $5 million in gross receipts filed on a tax return. And the third is that they have a physical presence somewhere in the us. So, you know, they either own space or lease space somewhere. So if you meet all three, you don’t need to report. But if you fall below that, you do. And what’s interesting is that for a lot of real estate investors, when they set up an LLC to hold title to a property, they’re gonna fall below that requirement. So in most cases, they’re gonna have to report.
So I’m gonna jump ahead here. What about a real estate syndication, like a group investment, if it has more than 21 investors that are equity investors, does that exclude them? If they have over $5 million of assets under management and more than 21 beneficial owners, because they’re all equity owners in, in this, you know, this syndication, this LLC?
Yeah. So that wouldn’t apply because it has to be 21 employees, so you know, people that are on the payroll. But yeah, the Corporate Transparency Act for syndications, it’s gonna be a complete nightmare just because, you know, the ownership changes all the time. Who’s a beneficial owner? You know, so in syndications it’s gonna be either someone who owns 25% or more, or if they’re the general partner, they would have the substantial control. So they would be the beneficial owners. But yeah, when it comes to syndications, there definitely are a lot of questions there.
Yeah, no kidding. I’m starting to see the slight complexities about this. Okay, so Ted, I’m gonna jump back here for a second. You know, I’m wondering why the government has to always kind of step in to create laws and legislation that they think is in the best interest of, of people. And sometimes it isn’t. Sometimes it isn’t. And even when it is, there’s unintended consequences or blowback, you know, from certain laws and legislation that’s passed that they don’t think about it. That’s why it’s called an unintended consequence. My understanding with the corporate, you know, transparency act is that it’s designed to minimize or mitigate financial crimes. It’s, it’s there to enhance transparency and combat financial crimes, you know, call it whatever you want, you know, money laundering, et cetera. What’s your opinion on this? Do you really think it’s gonna help? You know, is is this going to be problematic? You know, there’s this belief I think with some politicians that real estate is used as a vehicle to make it easy to launder money. And I don’t know if that’s actually true or not.
Yeah, and you raise a really good question. The reason why the corporate transparency was passed was to stop terrorist financing, money laundering, you know, any sort of illegal activity that is used when people create shell companies and then they pass money through them. And it’s funny ’cause I read the text of the bill and one of the things they mentioned as a justification for passing it, is that you have criminal actors that use entities to purchase real estate. It is a little concerning that, you know, that’s how the government thinks of us. But you know, I think my dad has alluded to the fact that a lot of that is anecdotal. I mean, in the 40 years that he’s been a lawyer, he’s maybe seen one or two cases where that’s happened. But you know, other than that, we help 13,000 people and everyone that we help is acting in good faith.
You know, they’re providing housing for people, they’re creating a source of passive income for themselves. I do think this law, like I understand why they passed it, but I think that it’s gonna have some very significant unintended consequences because as it stands right now, there’s a lot of people who don’t know about it. And there’s a lot of people who aren’t reporting their information to FinCEN. So, you know, they’re definitely behind there. But the Wall Street Journal wrote an article a few months ago, and the question that they asked was, are these criminals gonna self-report this information? Right.
That’s always the case. <Laugh>.
Yeah. And I mean, it’s insane because what I, I think is gonna happen is everyone here, you know, everyone listening to the show, who’s acting in good faith, who’s a law abiding citizen, they’re the ones that are gonna bear the brunt of this law. And the criminals, the ones who are doing the money laundering and all that are gonna skirt it. I mean, I think that there are some significant unintended consequences here. And I should mention that a federal district court in Alabama ruled that the Corporate Transparency Act is unconstitutional. Now, it only applies to the plaintiffs of that case, and eventually it’s gonna work its way up to the Supreme Court. So, you know, I think the constitutionality in question, I think people have a reason to question the effects of the law. So there definitely are a lot of unknowns right now and, you know, this whole thing, I mean, it’s gonna, it’s gonna transpire and we’re just gonna have to see what happens. But I think there will be a lot of unintended consequences and we’ll see what happens, you know, once the case reaches the Supreme Court.
Yeah, I mean it’s the same old thing, same old story. It’s the honest and innocent entrepreneurs and business owners and real estate investors that have to bear the burden of the legislation and the work, you know, the paperwork, the attorneys and all that stuff. And you know, the, the bad actors, the cons, whoever call ’em what you want, they don’t care. Like it’s no extra work for them. It’s no skin off their back. It’s just something they’re gonna ignore anyway. So I mean, is it really stopping, you know, bad actors and people who are laundering money? You know, this transparency doesn’t necessarily help ’cause a criminal is not gonna be transparent. I mean, that’s the bottom line.
Exactly. You know, I think criminals are gonna find ways to skirt this law. You know, whether they don’t set up entities to conduct business. I mean, you know, there’s, you gotta be a reporting company to report information. Maybe they just operate as sole proprietors, you know, they could set up like a nominee to be the manager. I mean, there’s just so many different things that they can do to skirt the laws and it’s just, it’s really unfortunate because the law abiding peoples are the ones who are gonna bear the brunt here.
Yeah. If we kind of go back to what I was asking you before an indirect way, how does this affect real estate investors more specifically? I, you know, I did ask you the impact of the Corporate Transparency Act, who it applies to and, and I, I guess basically who has to comply. But if you’re listening to this and you’re a real estate investor, maybe you’re just getting started or you’ve got your first property, your first deal under your belt, or maybe you’ve got a big portfolio, you, you’ve got 20, 30, 50 properties. How does this act affect real estate investors listening to the show?
Yeah, and that’s a great question. It affects real estate investors because if they have an entity that holds title to the property, you know, the rental property as well as the holding company too, they’re gonna need to file a report for each entity that they own. So, you know, if you have a Wyoming holding company on top, the Wyoming Holding company’s gonna have to submit a report to Fen. And then any entity beneath that that holds your rental properties, they’re gonna have to report a separate report to Fins. So for real estate investors, I mean, it is going to be very significant just because 90% of the people we help here are real estate investors and we’re filing these reports for them. Mm-Hmm, <affirmative>. So there’s that. And then also for more complex structures like syndications, like you’re gonna have to have your ducks in a row before you report your information to fiend. So for real estate investors who hold title to properties in entities, it’s gonna have a very significant impact on them because they’re gonna have to report all that information to the federal government as well as everything that they have to, to the Secretary of State.
Well, I can tell you what a lot of people listening to the show are thinking right now, because there’s a common structure where you have a parent holding company, often it’s an LLC, but whatever it is, you have a parent holding company and that holds, you know, an LLCs that are the title holding entities to the real estate that the person owns. So they technically don’t hold title to the properties, the LLC holds title and that those LLCs are held under one or more holding companies. It’s a, you know, a pretty common structure from an asset protection perspective. But what if those holding entities are all disregarded entities, meaning they’re single member entities that flow up to the parent holding company. And so there’s really is, I mean you could argue, I guess there’s no beneficial owner other than the entity above it, which is the holding company. So Ted, in other words, it’s basically this, a real estate investor who holds multiple properties in single member LLCs, also known as disregarded entities, I guess arguably don’t have, has one owner, I guess it’s one member, it’s the parent holding company. So in that scenario where you have title holding entities, these are LLCs with just one member and they’re known as disregarded entities. Are investors required to file anything under the Corporate Transparency Act in that scenario?
Yes. So you would need to file a report for all of the title holding entities as well as a report for the holding company. So, you know, if you have a holding company on top, there’s, that’s one report that you’ll need to file. And then on top of that, if you have any title holding entities beneath that, you’re gonna have to file a report there as well.
What a mess.
<Laugh>. Yeah, yeah. You’re telling me, I mean, I entered the law and this is the first thing that I’ve had to deal with. So it’s made it really fun. Crazy.
eah, I’m sure. Well, hey, jump in head first. Deep dive, pretty much, you know, I, I’m, I’m wondering what the likelihood or probability of you getting caught for not filing or reporting under the CTA and also, you know, makes me wonder, is there a grace period? You know, I’m sure there’s a lot of people who don’t, still don’t know about it and may not file for years until they find out about it, or maybe ever for that matter.
No, you’re definitely right there. And there is two reasons why, you know, the penalties kick in. So you need to file, I should first, you know, talk about the deadlines for when you need to file. So if you have an entity that’s set up in 2023 or before, you have until the end of the year to file a report. So you know, till December 31st, if you set up an entity in 2024, you have 90 days to get that information to sen. And then if you set up an entity in 2025 or later, you only have 30 days to get it in. But sen, so they were expecting to have 32 million reports filed this year, and in January there was only 400,000 that were filed. So they’re on pace for about 5 million. So they’re, they’re way behind in that regard because less than 20% of what they expected have actually reported.
So in because of that, they may delay enforcement. I mean, I can’t guarantee that. But another component here is just the constitutionality of the CTA. I mean, there’s that case in Alabama the ruling came out last Friday, and eventually that’s gonna work its way up to the Supreme Court. You know, they’re gonna have to answer the question of whether the Corporate Transparency Act is unconstitutional. So enforcement, I think, I can’t guarantee it, but I think it’ll be delayed just because people don’t know about it. And, you know, there definitely are some legitimate questions about whether or not this act is constitutional to begin with.
Yeah, it’s a good question. It’ll be interesting to see where the CTA goes if it’s maybe just thrown out entirely or probably, I think what will happen in my prediction is they’ll keep it, but they’ll modify it to make it more palatable for a lot of businesses. So, but again, if you’re a criminal, you’re a criminal, you’re not gonna comply with it. So it’s kind of like a, I hate to say a joke, the intention sounds good, but in practice it’s probably not a good act, meaning that it’ll fulfill what it’s intended to fulfill.
No, I, I totally agree with you. You know, the law, it has good intentions, right? I mean, you know, to stop criminal activity, that’s a good intention, but the effects we just have to see. And then also the constitutionality as well. So, you know, we’re, we’re just gonna have to wait and see what happens.
Yeah. So I guess, what are some final comments, tips, suggestions, or takeaways you can give real estate investors listening to this about the Corporate Transparency Act?
Yeah, so I think the biggest takeaway is that it’s important to have a lawyer who’s on your team who knows about the Corporate Transparency Act. You know, there’s a lot of lawyers who don’t know about it, and there’s a lot of people who don’t know about it either. And we here at Corporate Direct, we’ve been preparing for the Corporate Transparency Act for the last three years. You know, I’ve written a bunch of articles on it. I’ve given CLE talks with the Wyoming State Bar. And then on top of that, I also have a YouTube channel corporate, if you head on over to YouTube, type in corporate direct in the Address bar, you’ll find our channel. Please make sure to subscribe to it. ’cause I post there every week, but I’ve done about 10 videos on the Corporate Transparency Act. So, you know, if you want any information there, you can go to the channel, subscribe, and you’ll find what you need. But the biggest thing is that for real estate investors, like you do need a good lawyer on your team who can help guide you through these new laws. And, you know, my dad and I would be happy to help you guys, given the fact that the penalties of this law are so steep. It’s very concerning. And, you know, you just need that person in your corner who can help you through everything.
Yeah, I, I totally agree. I mean, I learned a number of things in this interview with you because I didn’t realize that the penalties were so steep and I didn’t realize that it was already in effect as of January 1st. So that just means that, you know, I’ve got some, some reporting to do as well, <laugh>. Okay. Before we get to your your book, five Tricks to Teach Your Kids about Money, is YouTube the best way to get in touch with you guys? Or do you have a website? What do you wanna leave?
Yeah, so there’s two ways to get in touch with us. The first is by going to corporatedirect.com. You know, we have a landing page there. We have a page on the Corporate Transparency Act. We have an article section, and then also if you wanna schedule a free 15 minute consultation with one of our incorporating specialists, there’s a link to a calendar there, and you can go ahead and do so. And you know, they know a lot about the Corporate Transparency Act as well. And then the second thing is just to subscribe to our YouTube channel, you know, go to YouTube, type in Corporate Direct, please make sure to subscribe to the channel. We just passed 35,000 subscribers, and like I said, I post there every week. So, you know, the more engagement and following, we have the merrier. So those are the two ways you can reach out to us.
Yeah, great. Okay. And, and we’ll put those links in the show notes and on our website as well so people can access it more easily. So take a minute. Tell us about your book, Five Tricks to Teach Your Kids About Money. The link is sunnstream.com/five-tricks. I’ll put that in the show notes as well. But just give us a quick minute on what the book’s about and why you wrote it.
So as you know, they don’t teach financial education in schools. I mean, that’s why Rich Dad, poor Dad sold so well. But a question that I got a lot, you know, there’s a push to educate kids about money, but the biggest question is how do you do it? How do you educate your kids to boost their financial IQ? And so I wrote a book, it’s a free ebook that you can download at the link that’ll be provided. And it just provides five tricks. I mean, it’s not like you’re pranking kids by tricking them, but just five methods that parents can use to boost your kids’ financial IQ. So, you know, one example, starting a lemonade stand, starting a business, you know, helping with marketing costs all that. And then there’s four other tricks in there too that parents can use as methods to boost their kids’ financial IQ. So, you know, head on over to sunnstream.com/five-tricks and you’ll be able to download that ebook for free.
Follow up question on your book, what’s the age group or age range that it’s targeted because I’m just thinking about my daughter here and, you know, I just don’t know if that’s for her or not.
Yeah. And that, that’s a great question. So the feedback I’ve gotten, it’s about eight to 12. It’s a 20 page book. It’s a very easy read, but, you know, 8 to 12.
Well, I, I think everybody should read it if it’s 20 pages. It’s a quick read and I think it’ll benefit everybody, especially parents, regardless of the age of your kids. Definitely.
And another thing is that I’ve sold 200 copies right now. My dad’s books have sold a million. So, you know, <laugh>, if anyone out there can help close that gap, that’d be much appreciated.
Well, we’ve got a little ways to go, but we’ll get there. <Laugh>
We do. Yep. But you know, slowly but surely.
Yeah. Cool. Well Ted, I appreciate you coming on. So thank you for taking the time today. This has been very informative. Yeah, I appreciate it. And then just wrapping up here, one quick minute, you know, we also have a book, a report. It’s called The Ultimate Guide to Passive Real Estate Investing. You can download that at our website@norarealestate.com. And don’t forget, you can get a free strategy session with our team of investment counselors, and that’s just available through our website as well. So don’t be afraid to talk to my team to help guide you in your real estate investing, and we can provide you all the contacts, resources that you need, including guys like Ted Sutton that can help you with your corporate compliance and the CTA, et cetera, et cetera. And remember, if you have a question about real estate investing, don’t forget to submit that to me. You could do it through at the website at for the podcast@passiverealestateinvesting.com. And I’m happy to take your question either directly via email or I’ll just talk about it on the show. But that is it for today. Remember to subscribe to the show, takes you just three seconds to do so. Thank you for listening. We will see you all on our next episode.
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