January 11, 2007 KKO Lawyers “Choosing the Right Entity For My Business” “Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do?” Taught by: Mathew N. Sorensen, J.D. S. James Park, J.D., LL.M South Sage Dr., Suite 2, Cedar City, Utah Telephone / Facsimile © Kyler Kohler & Ostermiller, LLP 2006

Disclaimer- Although the information contained in this Presentation may be extremely useful and helpful, please understand that the presentation of this information does not constitute an attorney-client relationship. Moreover, the information contained in this Presentation is for general guidance only. It is strongly recommended that each individual or entity obtain their own legal advice, particularly applied to their own set of circumstances, facts and specific situation. Kyler Kohler & Ostermiller, LLP is not responsible or liable for any advice that is taken and applied in a situation without direct consultation and representation specific to that individual’s or company’s needs. Instructor Notes © Kyler Kohler & Ostermiller, LLP 2006

Sales & Operations Small Business Sole- Proprietorship NO ENTITY 100% Rentals Sole Proprietorship Ordinary Income Schedule C Passive Income Schedule E Pros and Cons: Easy to set up but no asset protection and no tax benefits.

Sales & Operations XYZ Enterprises, Inc. C- Corporation Rentals “C” Corporation Issued Dividends C-Corp Tax Return 1120 Notes: Provides asset protection, but has major drawback of double taxation. 33%

Sales & Operations XYZ Enterprises, Inc. S- Corporation Rentals “S” Corporation Flow Thru Dividends (“Net Income”) S-Corp Tax Return 1120S Notes: Works well for sales and operations. S-Corporation allows you to minimize self employment tax. Also used for short term real estate. 33%

The S-Corporation Salary/Dividend Splitting Sole- Proprietorship Limited Liability Company S-Corporation 100k Revenue 50k Expenses 50k Net Income Self Employment Tax 15.3% $7,500 (approx) Before regular income tax and itemized deductions 100k Revenue 50k Expenses 21,750k Dividend Income No Self Employment tax on the Dividend $3,327 SAVINGS!! (approx) Before regular income tax and itemized deductions 25k Salary 3,250k Employment taxes This is sample of what one taxpayer may choose to report as payroll. Each taxpayer should analyze their individual situation for the amount of payroll that is appropriate.

Sales & Operations XYZ Enterprises, LLC Limited Liability Company Rentals Limited Liability Company (“LLC”) Flow Thru Income LLC Tax Return 1065 unless SMLLC Notes: Protects the business owner from the businesses liabilities. Primary benefit is asset protection. 33%

Sales & Operations XYZ Enterprises, LLC “Series” Limited Liability Company Rentals #1 “Series” Liability Company (“LLC”) LLC Tax Return 1065 unless SMLLC Notes: Gives you the benefit of having multiple LLC’s and having separate treatment for each series within the LLC. Allows for one tax return. Rental #2 Rental #3 Sub-Series #1 Sub-Series #2 Flow Thru Income

Family Limited Partnerships Farm land Raw Land Mom, Dad and/or Children as Limited Partners Charging Order Firewall From “Inside” and “Outside” Liability Notes: Excellent asset protection entity. Allows for protection from inside and outside liability. Family Limited Partnership General Partner (LLC/Corp) Shell Limited Partners Rental Property

Option 1 IRA $$ SDIRA $$ Raw Land - No Debt - No LLC/LP - No Partners - Direct Investment in name of IRA Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do? Qualified Money and Real Estate

Option 2 IRA $$ SDIRA $$ Rental Property (Income Producing) Non-Recourse Loan Mortgage Company - Non-Recourse Debt - No Personal Guaranty - No Sweat Equity - No LLC/LP - No Partners - Direct Investment in name of IRA Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do?

Qualified Money and Real Estate Option 3 IRA $$ SDIRA $$ Rental Property (Income Producing) Non-Recourse Loan Mortgage Company - Non-Recourse Debt - Single Member LLC - UDFI tax - No Personal Guaranty - No Sweat Equity - No Partners - Direct Investment in name of IRA Single Member LLC Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do?

Qualified Money and Real Estate Option 4 IRA $$ SDIRA $$ 50% Limited Liability Co. or Limited Php. IRA Owner 40-45% Mortgage Company Guarantor Rental Properties 3 rd Party Owner 5-10% - Recourse Debt - YES - Partners -YES - LLC/LP- Yes Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do?

Qualified Money and Real Estate Option 5 Self Directed 401K or Defined Benefit Plan 50% Limited Liability Company Mortgage Rental Properties Bs. Entity - Defer up to $44,000 in 2006 in 401K - Contributions vary for DB Plan IRA Owner 40-45% Guarantor 3 rd Party Owner 5-10% Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do?

Self-Directed Plan Compliance Issues Must be Real Estate Operating Company if the Retirement Plan and IRA Owner own more than 25% of the LLC/LP See 29 CFR Section Can’t have 100% control of LLC/LP Prohibited Transactions Transactions with Prohibited parties Use of Property Compensation of IRA owner Administration duties Annual report/valuation to Custodian Bookkeeping and tax return BEWARE!! This is not a comprehensive list, and also requires a properly drafted Company document!! Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do?

UBTI and UDFI Unrelated Business Taxable Income (“UBTI”) Exemptions for rental income, interest income, gains from sale of property other than property held for sale in the ordinary course of business. Unrelated Debt Financed Income (“UDFI”) Two Tier Analysis Real Estate Professional / Dealer Status Debt is the key calculation Trust Tax rates 990 Tax Return for IRAs, 5500 for 401ks ** This is only a survey of points to consider, these rules must be studied and implemented with care. Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do?