Protect your business from frivolous lawsuits by learning strategies that our clients implement to minimize risk.

Toby Mathis, Esq. explains how the risk-reduction formula helps prevent lawsuits for business owners and real estate investors.

Updated October 8, 2021

So, here’s what we’ve found after decades of investing in real estate… it is THAT simple. 

Seriously. 

Protecting your assets doesn’t have to be complicated. All you need is a proven and repeatable process.

That’s what we do with our Risk Reduction Formula.

Understanding the Risk Reduction Formula

The Risk Reduction Formula is a simple and visual formula where you fold a sheet of paper into quadrants and list out different investment activities. 

On one side, we’ll list your active income-producing activities and on the other, your passive income-producing activities. On the active side, there’s you, your house, car, family, and the things you own personally. To protect this type of business, we’ll put a figurative box around it and call it an LLC, a limited partnership, or a corporation. It’s an entity. 

Now, taking a look at our passive quadrant, we’ve actually got two subcategories: risk assets and non-risk assets. Passive activities include investing in stocks, bonds, money market accounts, and other things you own — these are your non-risk assets.

With these non-risk assets, I want to ensure these activities are isolated from “me” personally. Your business needs to be separate from you. 

To do that, we’ll put another figurative box around these, and generally this’ll be an LLC or limited partnership. 

When it comes to real estate, you have both active and passive activities. Active would be things like flips, construction, development, really all hands-on activities. The passive real estate activities are your rental properties, which rentals are always a big risk. Just by owning property, you can get sued — so for both the active and passive real estate, we’ll apply those figurative boxes. 

You need separate boxes. Boxes being the LLCs or corporations. 

Keep ‘Em Separated

I see it all too often: successful investors with one LLC holding 12 or more properties. In this situation, all it takes is one little mistake or lawsuit and poof — the entire business is taken from you. 

So let’s say I have three rentals. Each of those properties should have their own box (LLC), but each of those boxes would be held in a holding box. 

So let’s say I have an LLC. Real simple. This would be what’s called a holding LLC. I’d have one holding LLC, preferably in a jurisdiction that they can’t take it away from you. So we use Wyoming or Nevada for a number of reasons.

You can come to our classes and you can learn the specifics, but we’re going to make sure that you hold something that no one can take away from you no matter what happens.

Understanding Risk

People often think it takes something catastrophic to lose it all. 

Believe it or not, it’s usually the little things that are the most impactful. 

Let’s say you have kids and they get into a car accident, or you get into a shouting match with your neighbor and they sue you for defamation. And they say, “We’re gonna take everything you own.” With this type of structure, you don’t have to worry about them touching your real estate.

And on the same token, if you have something bad happen on a piece of real estate, it’s stuck inside its one box and can’t come out and contaminate your other pieces. Nobody can touch them there and your businesses are all safe.

Someone once asked me, “Hey, I’m a doctor and I’m going to own a $50,000 rental in Indianapolis. What’s the worst thing that could happen?” 

To which I said, “Well, on that rental, if someone hurts themselves and you get a major lawsuit or there’s mold or something or they allege something crazy, POOF. They garnish you the rest of your life.”

That’s the worst that could happen — unless you put that box around it. So that’s how we look at things. It’s called a Risk Reduction Formula and this is what we do with all of our clients. 

We always isolate each of our assets. 

You do that, and you won’t have any major problems. 

We’ve been working with tens of thousands of investors for more than two decades and we’ve had all the major things you can think of come across our desks. 

We’re talking tens of millions of dollars and guess who they never got? Guess who they didn’t get to shake down? Our clients. 

Our clients are structured so well that they can minimize that risk, immediately get out of things, settle where there’s liability — all without having to worry about plaintiffs’ attorneys looking at their total net worth and all their other assets. 

They’re able to get out of things quickly and privately. Plus, we use other strategies where we can keep your name out of a public record so, oftentimes, we can avoid the suit entirely. 

This strategy prevents so much harassment that our clients just don’t see most of the risks that come with investing. 

As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, a great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets. One of my favorites as well is our Infinity Investing Workshop.

Additional Resources:

Bonus Video