We just bought our first cash-flow investment property out of state. We live in CA. We are interested in setting up an LLC, but have heard conflicting information as to where it should be.
We have been advised to set up an LLC in Nevada due to some specific advantages. (BTW, I would love to discuss this further some other time; perhaps in another forum.) My immediate question is this: Is this possible, or are there specific rules about having to set it up in the state in which you live or in the state in which you are purchasing property (i.e., doing business)?
Any feedback would be appreciated! Thank you in advance.
You can set up the LLC anywhere but it will not do you any good because:
1. If you own a property in a state with tenants, property management and rents from the property, you will be considered to be transacting business in that state. This means that you will either need to set up your entity in that state or register it in that state as a foreign entity, which could add to your costs.
2. Setting up your entity in CA also does not make sense because you will still need to register it as a foreign entity in the state in which you own the property, again adding to your costs.
3. I also feel that an LLC may not be the ideal form of ownership if you wish to shelter your non-CA income from CA taxes unless you elect to have the tax treatment as a corporation and not as a partneship. In fact, I would very much prefer a C Corp for what you are proposing.
I do know of people who have owned vacant property in AZ through a non-AZ corporation, but those were vacant properties with no activity that could be construed to be doing business in AZ.
In short, the best approach may be to set up your entity in the state in which you own the property. If you plan to own properties in many states, you may wish to consider a holding company in a tax-free state with that holding company having a subsidiary in each state in which you wish to own properties.
But please consult with your tax advisor and do not take any major decisions based on my opinion or that of anyone else on ant forum.
You will need to either create the LLC in the state where the property is located, or create it somewhere else and then register it as a foreign entity in the state with the property.
You will have to pay taxes in the state with the property.
Always best to consult with an attorney to sort out your asset protection strategy.
You can set up the LLC anywhere but it will not do you any good because:
1. If you own a property in a state with tenants, property management and rents from the property, you will be considered to be transacting business in that state. This means that you will either need to set up your entity in that state or register it in that state as a foreign entity, which could add to your costs.
2. Setting up your entity in CA also does not make sense because you will still need to register it as a foreign entity in the state in which you own the property, again adding to your costs.
3. I also feel that an LLC may not be the ideal form of ownership if you wish to shelter your non-CA income from CA taxes unless you elect to have the tax treatment as a corporation and not as a partneship. In fact, I would very much prefer a C Corp for what you are proposing.
I do know of people who have owned vacant property in AZ through a non-AZ corporation, but those were vacant properties with no activity that could be construed to be doing business in AZ.
In short, the best approach may be to set up your entity in the state in which you own the property. If you plan to own properties in many states, you may wish to consider a holding company in a tax-free state with that holding company having a subsidiary in each state in which you wish to own properties.
But please consult with your tax advisor and do not take any major decisions based on my opinion or that of anyone else on ant forum.
Each state has it's one laws, rules and tax brackets for either doing business locally or as foreign entity.
I can only tell you what I did. I live in California as well and own properties in Texas and Alabama.
I have a Wyoming LLC for properties in Texas and Alabama LLC for the properties in Alabama.
The main reason for establishing an entity is for asset protection (Not for tax benefit as some people may believe) Some lawyers suggest to establishing two entities - One foreign and the other one local which would be owned by the foreign, so no one can reach you personally. It is up to you and the level of protection you feel you need, whether or not you want to take that rout.
Wow. All very good and thorough advice. Thanks all.
I am going to have to digest this is a bit. It sounds like there are multiple layers to consider -- asset protection, costs, taxes, etc.
Eddie, out of curiosity, how did the WY/TX pairing get matched as such, whereas AL/AL are together?
Hi, IMO, get with Charles Perkins, he is a CPA and has made posts here as to the reason of having the business entity, asset protection is just one element. How often will you be paying taxes as opposed to being sued? My primary reason was for taxation benefits and writing off expenses, use insurance if you need asset protection. How many landlords lose a 5 million dollar suit?
Jon is absolutely right with a business entity being in the state where the property is located. Eddie has been there and done that from CA, I'd suggest you get with him as well. Good luck, Bill
You should consult with an attorney to figure out entity structuring if you have significant assets. I really have to disagree with Bill's opinion. If you have worked hard to accumulate your wealth, the last thing you want is to fritter it away based on what someone says in an online forum.
Find a good corporate attorney, have a consultation with him and you should be able to figure out how you wish to proceed. If you are just starting out and do not have much assets, then Bill's advice is reasonable. But certainly not for wealthy people.
In any event, your original question was about where to set up your entity and I believe that has been answered.
It sounds like your main question is where to locate an LLC. Jon is quite right that in protecting the asset it is often a good idea to setup the LLC in the state. You don't have to, but you will need to still register as a foreign LLC in order to have access to the legal system there if or when something happens.
The location of the LLC can have some effect on tax implications, but more important is determining the source of income and nexus. Different rules apply for sales tax and any state income tax.
I need to leave for an appointment. I'll get back to this later.
Hi, good info Charles. Well if your family assets are in 8 digits on the bottom line you should already have at least one trust....I've got 2, a non-profit and in 6 LLCs. About to be 7 at closing this next week on an office/wharehouse in Ft. Worth. I could probably shoot a tenant accidently and they wouldn't get past 5 million in liability coverage....to each his own. As VIkram suggested, get professional assistance, you want to do it right the first time.
Jaclyn:
My Wy/TX LLC work almost as the other one in AL. Texas laws with regard to registering foreign entity is quite vague and since my properties there don't produce any net income, there is no tax consequences.
I would suggest as others did to seek an advise from a lawyer, however use your own discretion since lawyers tend to go overboard with structuring which can be very costly.
I'll give you an example of the other extreme. A very good friend of mine (The one who actually turned me into real estate) owns 14 properties all SFR which are spread over three states (TX, AZ, TN). He owns some of those properties since 1994, lots of them are almost paid off. All those properties are directly under his name and his wife's. He've never got sued. Would I choose this rout? Probably not, but it's a choice.
As Eddie mentioned, I ran barefoot for many years in real estate and never had a problem. As I just mentioned in another thread, a good insurance agent/broker can help you assess your risks as to what type of real estate investing you plan on doing. You may have more risks arising from other aspects of your life than in real estate. The best thing to do, IMO, iis to firts assess your risks, insure appropriately and palce assets in those entities that achieve your overall plan. Maybe you should be looking at a couple of trusts instead of just an LLC. The best way to get really good advice for your situation is to ask your professional advosry team, an accountant, an attorney and your insurance advisor.
An LLC is not recognized for federal tax purposes. The entity is very versatile and can be treated as a sole prop, partnership or corporate entity. In order to be treated as a corporate entity it will be necessary to make this election for your LLC, otherwise you are a sole prop or partnership by default.
Tax implications:
For federal income taxes where you register your business will make no difference. As a US citizen all income made in the US or from foreign sources are taxable here.
For state income tax purposes it gets more complicated. Income is allocated between states using several different rules. Because the property is in another state doesn't necessarily mean none of the income earned is taxable in California. There are several factors that will be looked in determining state income tax nexus or the ability for the state to tax your income earned.
To give you some idea of the complications here is a link to check out.
http://www.statetaxcentral.com/cache/praguide.htm#multiss
Because of the many rules imposed by different states it is quite possible to be required to report some income twice. You will want a CPA that is familiar with allocation rules to minimize this and take advantage of state specific credits and deductions as well.
Part of the problem is in how "doing business is defined." States have been expanding there reach over the last 10-15 years with state specific case law that allows them to capture income that goes against the Federal Commerce clause. Until the federal Supreme court addresses some of these issues, states are likely to enforce more legislation that can double tax some income.
Charles, how do state taxes work for a C Corp that is incoporated and owns property out of state? For example, a CA resident owns shares in a C Corp in NV which owns property in NV? Assuming all property management is done from NV, and considering that the C Corp is not a pass-through entity, the CA resident should be able to accumulate profits in NV without paying CA taxes, right?
Bill, insurance is essential but is not quite the same as good structuring. You can get landlord's insurance for things that happen at your property, for example. But what if you are at fault in a car accident and the liability exceeds your car insurance? Or what if you are at fault in an uninsurable / uninsured activity? Proper structuring can help in those situations because it is not event-specific. The goal behind asset protection planning is to protect your asset regardless of the cause whereas insurance covers you for specific things.
Finally, the idea that you have not been sued so far and therefore your structure is good is flawed. Any risky activity will have some survivors and some victims. The idea is to do things such that the probability of being a victim is reduced signficantly. Being lucky is not the same as having a good plan.
Jaclynkb,
May I suggest in the mean time, as you check with CPAs and Lawyers, to get an umbrella coverage. Typically on your owner-occuppied home owner's insurance, you can add $1 million for a few hundred dollars. You will also need to have liability coverage of $300k on your autos and rental. This will give you protection now and allow more deliberate thought on LLC, C-Corp, LLP,....
The C-corp is a separate entity. So C-corp will be taxed based strictly on its income sources. If the corp was formed in NV and does business exclusively in NV, the only tax the C-corp would pay would be NV state taxes and any federal taxes that apply. The only complication might be where the employees of the corporation work and if they have a physical office in the state and what they do for the business. In some states a home office doesn't count. In some states it does.
Anyone paid by the NV corp would have NV sourced income to include as W-2, 1099 or dividend income. As a CA resident that income would be apportioned based on NV and CA rules and one of the considerations would be if there was active or passive participation in the corporation. If the employee works in CA there might be a portion that could be considered CA income. You would want to discuss this with a CPA familiar with the state appropriation rules and the current case law concerning Nexus.
Looks like I mistyped. I'm sure that the states want to appropriate whatever they can, but I meant to say the state apportionment rules. There are several ways that states apportion the various types of income. States are very aggressive these days in attaching whatever income they can. The days when the commerce clause was strictly applied are gone. Maybe one day the Supreme Court will reign in the abusive powers that the individual states are claiming for interstate activity.
Thanks for the advice.
Asset protection is definitely a priority (among some others). Unfortunately, we live in a litigious area; I have heard threats of lawsuits tossed about too easily in these parts and sometimes to the most well-meaning of people.
I will take all of your advice and begin looking into it with an advisor. I learned a lot here.