Is another LLC a good move?

Question

I am new to RE investment and I think I might have jumped the gun on setting up an LLC. I'm a resident of California. Originally, when I began to explore real estate investment, my plan was to start accumulating properties in CA, so I opened up an LLC here and am going to have to pay the $800 franchise tax associated with that. The more research I did, the more I clarified my goals, I found that investing in another market would be more attainable and help me achieve my goals more efficiently. I am planning to purchase property in Memphis. My question is should I open up an LLC in Tennessee at this point to purchase my first property, which means incurring an additional $800 franchise tax or would I be better off using my CA based LLC to purchase my first few properties, avoid the additional $800 tax, and then open a TN based LLC once I start growing my portfolio further?

JD Martin · Answer

Honestly, until you reach some critical mass, you don't need an LLC at all. Maximum liability limits on any properties you buy and a good umbrella policy to cover additional exposure beyond the property limits. Don't make life any more complicated than it has to be. And don't believe that LLCs cannot be pierced by the courts; they are wise to the fact that a good number of LLCs are shell units only and the only real assets and guarantees are those in the sole owner's name. Now if you have some significant personal assets that you plan on transferring into the name of an LLC so you are able to use it as business collateral, that's probably a different story, but it sounds to me like you don't own any rentals at all right now.

Katie Balatbat · Answer

@Stephanie Ramirez You may wish to talk with someone familiar with CA laws specifically, including what constitutes "doing business" in California. You may find that you have to register a non-CA LLC in CA anyway, and pay the $800 per LLC, even for non-CA real property. As you've seen, California tends to operate differently than most other states. These forums are great for idea-generating, but you may want to talk with someone specific to laws for California residents.

*This post does not create an attorney-client or CPA-client relationship. The information contained herein is not to be relied upon. Readers are advised to seek the advice of a professional.

Marc Mora · Answer

@Stephanie Ramirez, I'd let a CPA who knows both states price the two paths before you pay anything more, and spend your energy on the Memphis plan, since the strategy and the team there matter far more on a first out-of-state buy than the entity does. I've owned property all over the country, and I'd be open to pressure-testing the plan with you. Is the first Memphis buy a long-term rental? Which strategy do you want to grow with after it?

Stephanie Ramirez · Answer

My plan is to implement a BRRRR strategy so yes I plan to keep it as a long term rental. I plan to grow using the same strategy.

Chris Seveney · Answer

Talk to your CPA, as I believe even if you open an LLC in another state (California, if that's your home state), we'll still hit you for the $800.

Stephanie Ramirez · Answer

I think the Tennessee LLC would actually offer more protection.

Walter D. Messer · Answer

I can’t speak for TN, however, in Ohio it’s only $100 or so to file a new LLC. Interestingly, we see a lot of CA investors here. I am also wondering if you decided to use your CA LLC, if it would provide legal protection in another state?

Stephanie Ramirez · Answer

Thank you, Nicholas. I’m planning to hold it.

Nicholas Floyd · Answer

Stephanie, I’d have a CPA familiar with both states compare the costs and requirements before opening another LLC. I work on the business funding side, so I’d also suggest checking with your lender about how they want the purchase structured before you commit. Are you planning to hold the Memphis property as a rental or fix and flip it?

Is another LLC a good move?

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