Where Should I Form an LLC if I'm an Out of State Investor?

18 Replies

Hi!

I own 3 properties (5 units) in Arkansas currently, but I live in California. I would love to know if anyone has advice on where I should set up my LLC?

I would like to do a couple of flips in the next 6 months and start putting all of my newly acquired fix & hold properties under the LLC as well.

As far as Arkansas and California go- it's much cheaper to get a business license in Arkansas so I am of course thinking that should be the state to get the license; however, can I still write off my rental payments in California for the portion of my home that is used as an office space even though all of my physical business is in Arkansas? I currently work about 20 hours a week in my home office here in California.

Thanks for any help you may give and I completely understand I should talk to a CPA and lawyer but recommendations are still welcome!

Your main LLC should be set up in Wyoming or one of the other states with charging order protection. This main LLC should own one or more LLC's in the state where you invest. Your main LLC has to be registered in CA which will cost you $850 Dollars per year.

Contact Lisa Shults with Corporate Direct (sent you a PM with her phone number). She will be able to help you get this started. It will cost you about $800 dollars per LLC. This way your name will not appear anywhere and you will have maximum asset protection. Just make sure you don't pick a name for the LLC that would give away your personal name.

LLC makes things so much more difficult and the cost since you're in CA doesn't help either. You might want to explore an umbrella policy vs LLC depending on your investments.

@Megan Stafford

You can probably do it either way - if you form in AR, you will need to register as a foreign LLC in CA. If you create a CA LLC, you will likely need to register as a foreign LLC in AR. CA takes a broad scope of what constitutes "doing business" in CA so either way you will be subject to the $800 minimum tax in CA. Not sure as to AR laws if they also have an entity level tax or minimum tax. You'll need to look into whether owning property in AR also subjects you to income tax in AR on an individual level - might need to file a AR tax return. Also look into AR's rules for agents of service of process. Having a AR-created LLC might require you to have an in-state agent for service of process, whereas filing as foreign, maybe you don't need an in-state agent.

CA generally has more complex laws in their corporations code and more requirements and such that sometimes it can make sense to create a CA-based LLC, despite an increased cost to set it up, especially since you will be subject to taxes anyway.

Also, if you're doing flips, you may want to look into an S-corp as a possible entity structure.

You definitely should be speaking with a CPA and attorney.  Let me know if you need referrals in Southern California or San Diego.

*This post does not constitute legal advice and is not to be relied upon. This post does not create an attorney-client or CPA-client relationship. Readers should seek professional advice.

Originally posted by @Katie Lepore :

@Megan Stafford

You can probably do it either way - if you form in AR, you will need to register as a foreign LLC in CA. If you create a CA LLC, you will likely need to register as a foreign LLC in AR. CA takes a broad scope of what constitutes "doing business" in CA so either way you will be subject to the $800 minimum tax in CA. Not sure as to AR laws if they also have an entity level tax or minimum tax. You'll need to look into whether owning property in AR also subjects you to income tax in AR on an individual level - might need to file a AR tax return. Also look into AR's rules for agents of service of process. Having a AR-created LLC might require you to have an in-state agent for service of process, whereas filing as foreign, maybe you don't need an in-state agent.

CA generally has more complex laws in their corporations code and more requirements and such that sometimes it can make sense to create a CA-based LLC, despite an increased cost to set it up, especially since you will be subject to taxes anyway.

Also, if you're doing flips, you may want to look into an S-corp as a possible entity structure.

You definitely should be speaking with a CPA and attorney.  Let me know if you need referrals in Southern California or San Diego.

*This post does not constitute legal advice and is not to be relied upon. This post does not create an attorney-client or CPA-client relationship. Readers should seek professional advice.

 There will definitely be an AR filing requirement. That said I won't advocate the direct An S-corp as the right away entity structure to look at if all of the business will be completed in AR. A C-corp or partnership may be a far better option depending upon facts and circumstances since AR does not have a gross receipts tax like CA does. There would be no tax due to CA. 

I would definitely agree with the thought of opening your LLC in AR and registering in CA.

@Michael B.

Thanks for the contact! I read an article about not setting up an LLC in Wyoming, Delaware, Nevada, insert other friendly state business tax structure, because I would still have to file in Arkansas where the investments are anyway and it's just more paperwork at the end of the day; however, I do not fully understand this charging order protection structure idea. I definitely need some legal and CPA advice at this point.

@Katie Lepore  

Yes, I definitely already file in Arkansas but have not owed tax there in the past. It has been owed in California as income since I reside here and have everything under my current individual name. I will definitely check the rules for agents of service of process in Arkansas.

Thank you very much for your help and advice!

@Steven Hamilton II

Your response is very helpful! 

I truly appreciate everyone's comment and time it took to respond. I am humbled by how generous everyone has been with their knowledge! Looks like I have a lot more research to do!

@Megan Stafford I would highly suggest that you form a LLC in a state with charging order protection (like the ones to mentioned). To explain this type of protection in simple terms, charging order protection protects your assets from your personal creditors that have a judgement against you personally. Let's say for example you have a child. Your child runs on the street, a cars swerves out of the way and kills somebody on the sidewalk. You would be personally liable and judgments against you would easily go into the millions. Any personal insurance protection that you might have in place will be eaten up by your creditors in no time. If your assets are owned by an llc that is owned by an LLC with charging order protection, then your personal creditors won't be successful if they go after the assets held by the LLC. For more information on this, check out this video:

https://www.youtube.com/watch?v=QaYcQz_NO4g

Originally posted by @Michael B. :

@Megan Stafford I would highly suggest that you form a LLC in a state with charging order protection (like the ones to mentioned). To explain this type of protection in simple terms, charging order protection protects your assets from your personal creditors that have a judgement against you personally. Let's say for example you have a child. Your child runs on the street, a cars swerves out of the way and kills somebody on the sidewalk. You would be personally liable and judgments against you would easily go into the millions. Any personal insurance protection that you might have in place will be eaten up by your creditors in no time. If your assets are owned by an llc that is owned by an LLC with charging order protection, then your personal creditors won't be successful if they go after the assets held by the LLC. For more information on this, check out this video:

https://www.youtube.com/watch?v=QaYcQz_NO4g

How's that work if say I rent my primary, don't have large savings, and my rentals are mortgaged with fairly high LTV. Wouldn't the loan on the rentals help keep creditors away since there's not much equity?

Bonus points if you can help explain the buy in personal name transfer to LLC and how that does/doesn't pierce corporate veil too (not that OP was doing this, but common).

The creditors will still be able to foreclose the properties to squeeze as much equity out of the asset as possible or they will just put a lien on your rental income. If they put a lien on the distribution then you would be done, because you couldn't do anything with the asset, would still have to pay PITI on it and the rental income would go to the creditor - bad deal!

If you buy in your personal name and transfer the asset into the LLC, then the asset is not "yours" anymore so it can't be attacked. It's a legitimate transfer like a sale which is why it can also trigger the due on sale clause with a lender. At this point you only have to make sure that you don't commingle funds which would happen for example if the rent payments still go into your personal account. The LLC has to be absolutely treated like a separate entity.

I'm not an attorney. This is just my personal acquired knowledge about asset protection for my own business. I hired 2 asset protection firms to make sure my assets can't be taken from me no matter what. The firms that I work with are Corporate Direct and Anderson Business Advisors.

@Michael B. nice thanks for the feedback... 

this is why I asked about the personal name to LLC part, it seems if you were to answer about intent on why you did it is 99% of the time it's cheaper/easier to qualify for the loan as a person rather than the LLC. Which would go against the 2 things below.

Not totally trying to get in the weeds and not saying you're wrong by any means, rather just counter point of when most of the time a LLC is to reduce risk.... just seems like it increases it.  

  • There is no real separation between the company and its owners. If the owners fail to maintain a formal legal separation between their business and their personal financial affairs, a court could find that the corporation or LLC is really just a sham (the owners' alter ego) and that the owners are personally operating the business as if the corporation or LLC didn't exist. For instance, if the owner pays personal bills from the business checking account or ignores the legal formalities that a corporation or LLC must follow (for example, by making important corporate or LLC decisions without recording them in minutes of a meeting), a court could decide that the owner isn't entitled to the limited liability that the corporate business structure would ordinarily provide.
  • The company's actions were wrongful or fraudulent. If the owner(s) recklessly borrowed and lost money, made business deals knowing the business couldn't pay the invoices, or otherwise acted recklessly or dishonestly, a court could find financial fraud was perpetrated and that the limited liability protection shouldn't apply.

https://www.nolo.com/legal-encyclopedia/personal-liability-piercing-corporate-veil-33006.html

I see a lot of people over complicating the LLC thing. People used to say Delaware and nevada because those were the first states to recognize LLC’s. Now the only difference in Wyoming and a few other states is your name is not public knowledge as owner of the LLC (that is my understanding).

If that’s not a big deal- set it up in your home state and if you invest out of state (I invest in 12 other states) I just file as a foreign entity in those states.

Originally posted by @Chris Seveney :

I see a lot of people over complicating the LLC thing. People used to say Delaware and nevada because those were the first states to recognize LLC's. Now the only difference in Wyoming and a few other states is your name is not public knowledge as owner of the LLC (that is my understanding).

If that’s not a big deal- set it up in your home state and if you invest out of state (I invest in 12 other states) I just file as a foreign entity in those states.

 Chris, as mentioned above, the difference is not only secrecy but the mentioned charging order protection. As I explained earlier, a llc without charging order protection (most states) can have a judgement against it that arises from a claim against you personally. That's a HUGE difference to the protection that most llcs offer. Most llcs offer protection from within (e.g somebody falls off the the roof of your property in the llc) but with charging order protection they protect your asset from outside claims 

 Megan,

Wyoming is the way to go. You can absolutely set the structure up yourself using a registered agent service in WY. Google will provide lots of places, just shop around for the best service. Youtube and plenty of websites BIGGER POCKETS have information on the basic structure you will want to set up...ie AR LLCs that are held by the WY LLC. I suggest "electing S-Corp status" for your WY LLC. Also charging order protections are written into your LLC Operating Agreement. That is a document you create and maintain yourself (or via an attorney). I'm currently looking for a good format for one now. Good luck.

I can tell you how I’m doing it. I eventually (my right away) form an llc In each state I own in.

Then eventually my holding company registered in Wyoming or Nevada most likely will be registered to own the other llcs.

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