Setting up LLC out of state
Hi All
Looking to guidance on setting up LLC.
I have one property in California and looking to purchase a second one out of state in Omaha or Georgia. I woudl like to move my current property under a LLC and purchase the other ones on that LLC. have a few question on setting up the LLC.
1. Setting up LLC in California and maintaining it I believe is ~$800 a year. So can I setup the LLC in a different state like GA or NE as those seem to be more cost effective? What are the pros & cons of setting up LLC out of state.
2. What would be the recommendation for the number of properties I setup under a single LLC?
Karthik
Karthik, Let's say that I have 3 houses. The first house (house #1) is owned by LLC #1, the second house is owned by LLC #2, and the third house is owned by LLC #3. If a tenant slips and falls at house #1 one and sues LLC #1, my properties owned by LLC #2 and LLC #3 are protected from that lawsuit. Aside from the extra liability protection I also like to keep my books in my finances extremely organized.
For each LLC that I form I also have a new EIN and a separate bank account.
That means all of my income and expenses for each property sits within its own bank account and therefore is very easy to see which property is more profitable that the others, pay bills, and manage finances.
If on the other hand, I had one LLC that owned all three of the properties I would have to rely on my bookkeeper and/or my property manager to differentiate which property brought in income and which expenses were attached to each property. This makes both keeping and finances a little bit more cumbersome.
California is generally more cumbersome than other states 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 as a CA resident.
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. CA taxes residents on worldwide income but may provide a credit for taxes paid to other states.
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. Of course, with all things, the answers to all these matters will depend on the circumstances.
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 and/or spouse 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.
Thanks for the information Hunter & Katie. Think it makes sense to open the LLC in CA given that we are going to have to pay the 800 anyway.
Quote from @Hunter Reed:Or you own a property management company that does that and you send it to your title holding LLCs.
Karthik, Let's say that I have 3 houses. The first house (house #1) is owned by LLC #1, the second house is owned by LLC #2, and the third house is owned by LLC #3. If a tenant slips and falls at house #1 one and sues LLC #1, my properties owned by LLC #2 and LLC #3 are protected from that lawsuit. Aside from the extra liability protection I also like to keep my books in my finances extremely organized.
For each LLC that I form I also have a new EIN and a separate bank account.
That means all of my income and expenses for each property sits within its own bank account and therefore is very easy to see which property is more profitable that the others, pay bills, and manage finances.
If on the other hand, I had one LLC that owned all three of the properties I would have to rely on my bookkeeper and/or my property manager to differentiate which property brought in income and which expenses were attached to each property. This makes both keeping and finances a little bit more cumbersome.
If you're buying out of state in Georgia, buy a WYO holding LLC then a child LLC in Georgia under it. If you're buying 1, just need 1 LLC. If you're buying multiple, create two child LLCs both in Georgia. One that serves as a Property Management(this one hires the PMs, contractors, etc.) and the other that actually holds title of the property(literally nothing but). Create a management agreement between the two and keep them entirely separtely.
Your property management LLC will have separate books on each house's accounts, and will convey them to the title holding LLC. Literally, all that filing and separation is that the first level. Then at the actual house holding level is the net p/l.
That is an interesting suggestion Jason.. I will research more on it..
Talk to an attorney in the state you are looking to setup an LLC in.