Can a MA LLC be an owner of a RI llc?

6 Replies

I'm going into a partnership with someone who lives in and invests in Rhode island. We want to buy a rental property together and the property is in RI. So if we create a RI llc to buy the property, can I put my MA LLC down as part owner of the RI llc instead of my name? Or no because it's out of state?

@Raeshelle C. I'm not an attorney but my understanding is yes, you can definitely do that, and I believe things like that happen every day.

While I can see some possibilities for why someone would want to set things up that way, I do have the instinctual thought that it might be over complicating things.

Technically the second LLC is another layer of asset protection, and maybe you have a very specific entity structure setup for taxes which would make it beneficial to do it that way (an LLC inside an LLC), but it's worth asking the question of whether these is much difference, or much more protection, than just having you (presumably a Mass. resident) be the member of the RI partnership LLC straight-out rather than having your MA LLC be the member.

Also, depending on what else you have going on in your MA LLC it may be a disadvantage to have it be a member of the RI LLC from an asset protection perspective - if someone were to be able to pierce the veil of the RI LLC then everything in your MA LLC would be at risk.

If you do go with the MA LLC as a member of the RI LLC, when you go to sell the property you'll have non-resident withholding - but you'd have that if you personally were the member of the RI LLC as well.

You'll also need to be careful how you sign anything relating to the RI LLC - you'd have to be careful not to sign as member of the RI LLC but as member of your MA LLC, member of the RI LLC. It sounds simple, but depending on how many documents/checks you'd be signing, it might be easy to slip up.

My instinct is to say that if you need to ask the question, chances are that it's better to keep your life simple and just personally be the member of the RI LLC and have it be separate from your MA LLC.

But I'm not a lawyer or an accountant and you should probably ask this question to one of each to get advice for your specific situation. The "right" answer for you can certainly differ depending on the whole picture of your financial, tax & business activities.

Originally posted by @Anthony Thompson :

@Raeshelle C. I'm not an attorney but my understanding is yes, you can definitely do that, and I believe things like that happen every day.

While I can see some possibilities for why someone would want to set things up that way, I do have the instinctual thought that it might be over complicating things.

Technically the second LLC is another layer of asset protection, and maybe you have a very specific entity structure setup for taxes which would make it beneficial to do it that way (an LLC inside an LLC), but it's worth asking the question of whether these is much difference, or much more protection, than just having you (presumably a Mass. resident) be the member of the RI partnership LLC straight-out rather than having your MA LLC be the member.

Also, depending on what else you have going on in your MA LLC it may be a disadvantage to have it be a member of the RI LLC from an asset protection perspective - if someone were to be able to pierce the veil of the RI LLC then everything in your MA LLC would be at risk.

If you do go with the MA LLC as a member of the RI LLC, when you go to sell the property you'll have non-resident withholding - but you'd have that if you personally were the member of the RI LLC as well.

You'll also need to be careful how you sign anything relating to the RI LLC - you'd have to be careful not to sign as member of the RI LLC but as member of your MA LLC, member of the RI LLC. It sounds simple, but depending on how many documents/checks you'd be signing, it might be easy to slip up.

My instinct is to say that if you need to ask the question, chances are that it's better to keep your life simple and just personally be the member of the RI LLC and have it be separate from your MA LLC.

But I'm not a lawyer or an accountant and you should probably ask this question to one of each to get advice for your specific situation. The "right" answer for you can certainly differ depending on the whole picture of your financial, tax & business activities.

Thank you for the response! If I put my name in the RI LLC, and then we buy the property with the RI LLC, that property doesn't show up on my credit report right? And I'm not personally liable for the property - the ri llc is, right?

Questions about liability should certainly be directed to an attorney. My understanding, as an investor who is not an attorney, is that a properly formed and maintained LLC would protect you from personal liability for anything involving the activities of the LLC.

However, if you get a loan to buy the property, you will almost certainly have to personally guarantee the loan which means you could be liable to the lender if it had to foreclose and lost money in the process.

As far as the loan showing up on your credit report, that has almost nothing to do with the form of ownership of the property (personal vs. LLC or other entity).

The main determining factor of whether it's going to show up on your credit report is who the lender is. If it's a bank or other institutional lender (a company whose business is lending), you should expect they are plugged into the credit bureaus and will report your payment history there.

If your lender is a private person, like a friend or family member, or maybe a local person who makes a few loans a year, I would assume they are not plugged into the credit bureaus and the loan won't show up on your credit report.

Keep in mind that if you apply for other loans, and they ask you for a schedule of real estate owned and mortgages you're responsible for, and you omit a property and/or private mortgage from that listing, you'll likely have committed fraud by saying that you're submitting complete information about your financial situation but intentionally omitting something.

In other words, a loan/property may not show up on your credit report, which means a lender you're applying to for a mortgage may not know about it, but that doesn't mean you're not required in the application process to list it anyway, and it does mean that if you intentionally omit it, you're probably committing fraud or breaking some other law(s).

I would assume that the loan could show up on your credit report, and that you will be listing it in future loan applications to institutional lenders, and behave accordingly. Which means, if your RI business partner is going to be paying the mortgage, you should have some way of periodically checking that the payments are actually being made on time (for example, online access to the account if it's an institutional lender).

After all, regardless of whether it shows up on your credit report, you'll likely be personally guaranteeing the whole amount of the loan which means if your business partner dies or walks away, you could be responsible for the entire loan. So you should be aware of that and act accordingly, by making sure you have a way to check on the status of the loan payments regularly.

To follow up on Anthony Thompson, likewise, I am not an attorney. However, since an LLC is simply an entity, I can't see why the state of inception makes a difference. Just thinking out loud, an investor who is a resident of RI (ie a personal entity) should be able to invest in MA-all else being equal. Obviously, as I am not an attorney, please ensure if there is a certain state specific regulation that would prevent such a transaction.

Stephen

@Raeshelle C.   there is a  business tax in RI that is $500. I am not sure if  you did this if you would have to pay that tax for Both MA and RI LLCs. You should check that out. 

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