Where to locate the LLC

Question

New to realestate investing. First property we have acquired is out of state. Looking to acquire additional properties and plan to set up an LLC structure. Does anyone have a recommendation for the best states for the first LLC? Considering VA, ID, Delaware, and Wyoming so far. I live in CA and don’t want a CA LLC. Thanks.

Katie L. · Answer

@Michael Larsen

California is a sort of beastly state when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you will likely be deemed to be "doing business" in California and therefore likely subject to CA taxes. California charges a minimum tax of $800 a year per LLC, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you will likely need to register it as a foreign LLC in California. Though, this process will be the same for the other state (if you created a CA LLC you may need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will probably need to pay registration and filing fees in at least 2 states if you don’t buy CA property.

Be sure to tell your accountant that you may now need to file non-resident income tax returns in each state where you own property as well. Most likely the state where the property is located is where lawsuits would be brought if they are something for personal injury like a trip and fall or something of that nature because the “cause of action” arose in that state. So even if you pick a state with stronger protections like WY or NV, the cause of action arose in the state where the tenant fell, so likely that the court where the accident happened would have jurisdiction.

California tends to have more laws on the books and requirements and restrictions that it can be a good idea to form a CA LLC for out of state property so that you as a CA resident are covered, and to try to have your contracts fall under the purview of CA courts.  It also is helpful to have a California LLC in case you ever sell that property and move into another state so that you do not need to form a new LLC altogether with new operating agreement, just re-register in the new state as a new foreign LLC.  Also, the state of formation is likely where internal disputes would be brought among LLC members, so if you and a partner live in CA, you probably want to arbitrate in CA if the two of you had a disagreement.  But, that is not always the right answer and you should speak with someone familiar with your personal situation to get advice specific to you.

*This post is informational only and is not to be relied upon.  Readers are advised to seek professional advice.  This post does not create an attorney-client or CPA-client relationship.

Michael Larsen · Answer

Thank you, Katie. Grateful for your thorough and thoughtful response. Much appreciated! We will likely have properties mostly outside CA. Your points regarding where I would be deemed doing business is key. Thanks.

Randall Alan · Answer

Supposedly Nevada has some of the best (read: landlord friendly) LLC protections available.  You become a foreign entity to your home state though if you do an out of state registration, so there are typically extra steps you have to take if you register out of state... like registering to do business in the state you are actually in - which typically costs extra money.  Because of the extra expenses with multiple properties owned, we tend to just lean on a big umbrella policy and keep the properties in our own name.  By the time you count of the corporation commission registration fees for multiple entities you end up spending less money that way.  That's not to say that LLC's don't provide you more protection though.  It's a risk versus reward type of proposition.  What are the odds of being sued?  What are the odds they sue for more than $X million dollars you have for liability insurance?  Most attorneys take the easy path and just want the insurance money. (I hope!)

Randy