Where to form LLC?

4 Replies

I am planning to see a lawyer within the next week or so. I am definitely planning to create an LLC. However, my issue is that I still haven't settled down on a target market.

For those that have experience with LLCs:

1. Should I wait until I pick my market and form the LLC in that state?

2. Is it difficult to do business in a state other than where the LLC was registered? How much work does it take to do business in another state?

3. Is it more expensive? How much more?

For reference, I'm currently looking at TX and OK, but I live in CA.

Thanks

@Carlos O. Thanks for the post. You're digging a well before you're thirsty, which is absolutely great. But I would hold off on the LLC until you have enough properties to make it worth the $800 a year expense in CA. If you're in CA, and you conduct business in CA real estate, you must register your LLC here, you can't register it in another state.

As far as the protections LLCs provide, unless you're making tons of money in different asset classes, I would hold off on the LLC. Pick up a nice umbrella policy for $1mil in coverage, mine cost me about $75 bucks a year.

@Jordan Thibodeau  Thanks for input Jordan, a few people have mentioned to just get an umbrella policy. I thought LLCs only had a 1 time cost of setup, but if that isn't the case, then getting an umbrella policy would be better. 

Originally posted by @Carlos O. :

I am definitely planning to create an LLC.

Attorneys will usually advise you to title properties in the name of an LLC for the liability protection they offer. Some will suggest a different LLC for each property to compartmentalize the risk.

However, that's not the whole story.

You need to understand that an LLC affects your options for bank financing. You can't get a 30-year fixed rate conforming mortgage with an LLC. You will probably need to get a portfolio loan, held by the bank that gives it to you, and often this means an ARM, points, and/or a higher interest rate.

You also need to file federal and state tax returns for each LLC.

Also, an LLC doesn't shield you from the financial liability of the mortgage. The bank will require a personal guarantee by you.

Some people will advise you to buy the property personally and then use a quit-claim deed to transfer it to the LLC after the closing. You might get away with it, but it clearly gives the bank the option to invoke the due-on-sale clause in your mortgage.

An umbrella policy is a compromise that some investors make -- they accept the personal liability, but then insure against it.  If you go with this option, make sure the policy explicitly covers your rental properties.  Also, bear in mind that a lawsuit can result in someone going after your future income, so make sure you have enough coverage.

You need to carefully weight the pros and cons.

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