Real Estate Investor · Ventura, CA · Member since 2016 · 29 posts · 3 votes
We are getting ready to set up our LLC and are wondering if anyone from California has opened one in another state to get around the large yearly tax of $800 in our lovely state. We have been advised by an attorney to open the LLC in the state where you will be conducting business and we want to be on the up and up.
We will continue to live here, though most of our SFH's and investments will be out of state.
Real Estate Investor · Paso Robles, CA · Member since 2016 · 18 posts · 2 votes
10y
Ya, I've been doing a lot of research and ended up with a california LLC. The reason for it is that even if you open the LLC in another state, you'll still need to pay the tax if you do any business in California. So unless you are strictly doing business in the state you are opening your LLC in, it wouldn't matter as you'll still have to pay the $800 yearly tax. If you do figure out a way around it, please don't hesitate on letting me know.
Investor · Whitttier, CA · Member since 2015 · 405 posts · 110 votes
10y
@Craig J Eiland Congrats on taking the steps to develop your business. The first year the SFB waives the $800 and only taxes you on the income that your business generates. Yes, there are benefits to forming an entity out of state; however, if you don't plan on spending anytime and or developing your business in that state, I would not be inclined to do so; but, check with your legal and accounting professionals.
When I was deciding what entity to form, I inquired with my attorney about the series LLC /Delaware series LLC. At the time of our conversation, he stated that he was not aware of or not have having had encountered any precedence for or against the series LLC model. He further stated that the theory behind the series LLC model is sound, it had yet to be proven in court, i.e. though punitive litigation. He then asked if I wanted to be the first to prove and or defend the model viability. I said no and formed a different entity.
Whichever you choose keep us posted on your success.
Attorney · Bay Area, CA · Member since 2016 · 164 posts · 135 votes
10y
@Craig J Eiland If you plan on purchasing investment real estate outside of CA, then you will want to open an LLC in the state where you purchased the property. As a CA LLC, you cannot conduct business in another state without first filing for a "foreign status" and obtaining permission from that State.
Opening an LLC in another state is fairly simple but I always advise speaking to a local attorney. Generally, the only (minor) obstacle in opening an LLC in another state is having a service agent with an actual address in that state to accept service of process if you get sued. Fortunately, there are many companies/attorneys in other states that will act as your service agent for a small fee.
Regarding taxes - you will not have to pay for the CA LLC franchise tax ($800 per year) because you do not have a CA LLC. However, depending on which state you conduct your business in, you will have to pay STATE INCOME tax in that state and likely CA as well. You can typically avoid double taxation by paying income tax on the profits earned in the state of business and receiving a tax credit from your resident state (CA).
Rental Property Investor · Concord, CA · Member since 2016 · 499 posts · 219 votes
10y
@Naseer Khan I doubt if Craig can avoid CA LLC tax because he is living in CA and no matter where he does business, as long as he lives in CA, he will have to pay CA tax. That's what my understanding is after doing some web research since I am planning to open 2 LLC this year - one for RE and one for software
Attorney · Bay Area, CA · Member since 2016 · 164 posts · 135 votes
10y
@Avi Garg I think you may be confusing CA LLC "franchise tax" and CA state income tax. You would only have to pay the LLC franchise tax if you operate a CA LLC, which is a minimum tax of $800 and goes up depending on your LLC's annual income.
As a resident of CA, you are required to pay CA state income tax on ALL income you receive, including income earned in other states. So, if you have a Texas LLC that is earning income, you would have to pay CA state income tax on that income, even though it was earned in Texas.
Rental Property Investor · Concord, CA · Member since 2016 · 499 posts · 219 votes
10y
@Naseer Khan you may be right but it was my interpretation of the CA LLC law below (bolded for the citation I am referring to):
Under California law, all LLCs are required to annually file a California tax return and pay at least an $800 California franchise tax if they:
Engage in any transaction in California for the purpose of financial gain or profit.
Are incorporated or organized in California.
Have qualified or registered to do business in California.
Are “doing business” in California, whether or not they incorporated, organized, qualified or registered under California law.
The Franchise Tax Board ("FTB") takes the position that an LLC organized in a jurisdiction outside California is nevertheless "doing business" in California if:
It is a member of an LLC that does business in California.
It is a general partner in a partnership that does business in California.
Any of the LLC's members, managers, or other agents conducts business in California on behalf of the LLC.
In addition, an out-of-state LLC is "doing business" in California if:
The LLC is commercially domiciled in California (i.e., California is the place where realistic control of the LLC’s functions is centered).
Sales, including sales by the LLC's agents and independent contractors, in California exceed the lesser of $500,000 or 25% of the LLC's total sales.
Real or tangible property of the LLC in California exceeds the lesser of $50,000 or 25% of the LLC's total real and tangible property.
The amount paid in California by the LLC for compensation exceeds the lesser of $50,000 or 25% of the total compensation paid by the LLC
Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
10y
@Craig J Eiland I agree with @Avi Garg. California has a very broad definition of "doing business in California", and assuming you'll be a managing member of your LLC, then you'll still likely end up having to pay the $800 (minimum) annual franchise tax unfortunately.
Here's some more reading on the subject if you're interested:
Attorney · Bay Area, CA · Member since 2016 · 164 posts · 135 votes
10y
@Avi Garg That's good information you found. It's breaks down the requirements well. The scenario that I originally replied to was regarding as CA resident wanting to buy out-of-state property. In that scenario, the CA resident is not doing business in CA because the property is located in a different state. Thus, if he opens an out of state LLC and buys property in that state, he should not be subject to the CA franchise tax for LLCs.
However, if a CA resident is attempting to establish an out-of-state LLC (Delaware, Nevada) and conduct business in CA (property investment), then he/she would be required to file foreign status in CA and pay the applicable franchise tax.
Regarding the statement that "an out-of-state LLC is “doing business” in California if: The LLC is commercially domiciled in California (i.e., California is the place where realistic control of the LLC’s functions is centered)"
I would argue that this does not apply to certain real estate investments, especially when it is passive in nature (buy and hold). This would appear to apply more to someone selling goods intrastate. I could be wrong and an agent at the CA franchise Tax Board could disagree but I think it's a pretty valid argument.
@Craig J Eiland Congrats on taking the steps to develop your business. The first year the SFB waives the $800 and only taxes you on the income that your business generates.
I'm not sure if that's correct. I think awhile back California FTB had some kind of business development promotion to waive the first year of ($800) minimum tax. Talk to an accountant before betting on this. Also if you have a California LLC - always file on time or you'll be kicking yourself with hefty fines/fees.