If you’re reading this, chances are you’re already hip to the benefits of forming a limited liability company (LLC) to manage your real estate investments. But you may not know that not all LLCs are created equally. How beneficial your LLC structure is to you depends heavily on the state where it is formed. Thankfully for us investors, you don’t have to actually live in the state that your LLC is formed in. So, you’ve got choices.
And you’ll want to choose wisely. Each state has its own restrictions and benefits on the formation and operation of LLCs. Some of these are legal, operational, or even tax-related. While there may be certain benefits to forming an LLC in your state of residence, they are but a fraction of the rewards you can reap from operating in a pro-business state, such as Texas, Nevada, or Delaware.
As with most things, there is no one-size-fits-all solution. This article will compare the benefits you can reap from forming your real estate LLC in these three states. You can use this information (along with the advice of your attorney) to determine which protections you need most—and therefore which state will be the best for you to form your LLC in. Please be aware that the information in this article applies to both traditional LLCs and the series LLC. If you’re not sure about the difference, check out my previous BiggerPockets article comparing the traditional and series LLC. Though I’ll use “LLC” throughout the article, understand that these three states are also great options for forming series LLCs.
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The Benefits of Texas LLCs: Simple Management & Low Regulation
Full disclosure: I’m a resident of Texas and can confirm that we do indeed do everything bigger here. LLC benefits are no exception. The primary perk of forming your LLC in Texas is that you won’t have to pay burdensome management fees. You may manage your LLC yourself, or even better, with the guidance of your attorney and CPA. Not having to worry about management fees simplifies bookkeeping, allowing you to concentrate more of your efforts on building up your business.
Limited liability companies are required to produce a significant amount of legal documentation to be fully covered from an operational standpoint. A common example of legal documentation is taking meeting minutes. But if you form your LLC in Texas, you aren’t required to spend your time and money on these annoying (and often unnecessary) details, but you still get your legal protections. Those protections include the liability protections that are vital for a solid asset protection plan. The Texas LLC can make your life infinitely easier and also improve your chances of beating a potential lawsuit. The LLC is a critical part of asset protection that real estate investors can’t afford to ignore.
As far as LLC laws, which vary from state-to-state, Texas is very hands-off. The low level of regulations can make the Texas LLC a very attractive option for real estate investors. The Texas series LLC enjoys all of the same benefits listed above. But the Lone Star State is not your only option. Let’s talk about Nevada.
The Benefits of Nevada LLCs: Privacy & Taxes
The major benefits of a Nevada-based LLC are twofold: greater privacy and lower tax costs. You know the PR campaign about how “what happens in Vegas stays in Vegas”? Well, it’s as applicable to LLCs as it is to wild parties, torrid affairs, and gambling. LLCs formed in Nevada aren’t required to disclose the names of their owners. So you get total anonymity, which will help protect you from lawsuits. And you don’t even have to move to Sin City to enjoy that.
|Note From the Legalese Translator: Anonymity is possible in any state—not just Nevada. Savvy investors can use Anonymous Land Trusts in conjunction with their LLC structures to enjoy additional anonymity and stronger asset protection. Any investor can take advantage of this structure, no matter which state they live or choose to form their LLC in. Investors based in California may want to do additional research about the Delaware Statutory Trust, which offers many of the same benefits of an out-of-state series LLC, while also providing a way around the California Franchise Tax (an $800 annual expense at the time of this writing).|
But you should be aware that the LLC alone will not protect you from lawsuits. It’s a vital component of an asset protection plan, but on its own will be insufficient. The anonymity factor does, however, beef up the liability protection conferred by this type of LLC.
The second, and for many investors most compelling, benefit of a Nevada-based LLC is the tax treatment. If you form your LLC in Nevada, you don’t have to pay any state taxes whatsoever. You will have total freedom from both corporate and personal taxes.
You don’t have to move to Nevada, but in-state residents do reap some additional benefits from a Nevada LLC for the tax reasons mentioned above. But if you do, I’m sure you’ll acclimate to the sweltering heat in no time. If not, you can use some of that money you’ll be saving on taxes for desert garb and an industrial-grade AC. But if you can’t handle the heat of Texas or Nevada, there’s always good old Delaware.
The Benefits of Delaware LLCs: Judicial & Operational Perks
Delaware is our final famously pro-business state. It offers a unique legal protection in the form of a Chancery Court. The judges who have authority over this court have a reputation for being favorable to business owners. After all, they are all specialists in business law specifically.
Now, a favorable court isn’t a crooked court. Just because these judges are known to side with business owners doesn’t mean you can start getting sloppy with the books. You’ll have to maintain your due diligence, obtain and keep proper legal coverage, and keep accurate records of all of your business dealings. This is all the more reason to have an attorney involved in forming your LLC or series LLC. A pair of legally trained eyes can ensure you’re conducting your operations by the book, and some attorneys even provide compliance services.
If the operational benefits of the Nevada-based LLC appeal to you, you’re in luck. Delaware confers these same benefits to LLC members. For much, much more information than most sane people will ever care to know about this type of entity, you can bone up on Delaware LLC formation and relevant law here.
Bottom Line: Know Your Options for Forming Your LLC or Series LLC
So if you’re looking into forming an LLC or series LLC, take the time to study Texas, Nevada, and Delaware in greater depth. I hope the above information has been a useful primer for you. If you care to add to the discussion or have questions about any of this, dash them off in the comments section below. I’m happy to respond and help out my fellow investors as much as possible.
If there’s anything else you’d like to learn about LLCs, series LLCs, or asset protection, feel free to let me know about the topics that interest you as well. If you have had experiences with LLCs formed in any of these states, don’t be shy about letting the community know how these structures have worked out for you as well. Thanks for reading!
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