Should I setup a Delaware LLC for a property if it's not located there?
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CPA and Attorney · San Diego, attorney · Member since 2022 · 301 posts · 219 votes
3yCalifornia 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.
8 Replies
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes3y
Quote from @Raj A.:
If and when the time comes, I know many of said it is best to setup an LLC for the property you intend to purchase ("123 Main Street LLC") for a variety of legal/financial reasons. I also know in general, Delaware offers a very friendly business environment, hence why many companies choose to setup an LLC there even if they are out of state. Do others here setup Delaware LLCs when their property is not located in Delaware? What are the pros/cons? I know for California for example, I'd also need to pay registration fees with the State Franchise Board, etc.
Thanks,
RajI have the LLC in the state I am living in. When LLC laws first came out Wyoming and Delaware laws were very favorable but all the other states have caught up. Its just a matter of how much more money you are gonna spend to open it in multiple states and understand with your CPA if you are paying taxes in that state for assets you own and where company is located are you paying more.
7e investments53 Reviews - 3yRaj A.Member since 2023 · 54 posts · 14 votesOP
Quote from @Chris Seveney:
Quote from @Raj A.:
If and when the time comes, I know many of said it is best to setup an LLC for the property you intend to purchase ("123 Main Street LLC") for a variety of legal/financial reasons. I also know in general, Delaware offers a very friendly business environment, hence why many companies choose to setup an LLC there even if they are out of state. Do others here setup Delaware LLCs when their property is not located in Delaware? What are the pros/cons? I know for California for example, I'd also need to pay registration fees with the State Franchise Board, etc.
Thanks,
RajI have the LLC in the state I am living in. When LLC laws first came out Wyoming and Delaware laws were very favorable but all the other states have caught up. Its just a matter of how much more money you are gonna spend to open it in multiple states and understand with your CPA if you are paying taxes in that state for assets you own and where company is located are you paying more.
Much appreciated Chris! That makes a lot of sense.
- CPA and Attorney · San Diego, attorney · Member since 2022 · 301 posts · 219 votes3y
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.
- 3yNate MeekerBusiness MemberReal Estate CPA | California · Member since 2020 · 543 posts · 251 votes
Quote from @Raj A.:
If and when the time comes, I know many of said it is best to setup an LLC for the property you intend to purchase ("123 Main Street LLC") for a variety of legal/financial reasons. I also know in general, Delaware offers a very friendly business environment, hence why many companies choose to setup an LLC there even if they are out of state. Do others here setup Delaware LLCs when their property is not located in Delaware? What are the pros/cons? I know for California for example, I'd also need to pay registration fees with the State Franchise Board, etc.
Thanks,
RajHey @Raj A., I'm a CPA in Riverside, CA that specializes in real estate and personally invest out of state. I've spoken to several lawyers and decided it was best for me to have a domestic LLC in the state of each rental property and foreign register it with CA. (You are right, there's no way around CA fees if you live here.) There are plenty of different viable options, some more flashy and viral-worthy than others if you know what I mean.
I've been practicing for 7 years and have clients that do it every possible way under the sun. None have run into legal problems yet, and some spend several more thousands on entity structures than others. Just some food for thought.
The CPA Realtor 569 Reviews - 3yRaj A.Member since 2023 · 54 posts · 14 votesOP
Much appreciated and thanks for the confirmation Nathan. Between everyone else's post and yours I'll proceed with the simplest LLC setup to start out especially given I'd rather use that capital for the next deal vs a complex org chart on paper.
- 3yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
I think if you are a big enough company and items such as extensive business friendly case law, charging order protection, etc are important to you. Then you would want to create an LLC in the often mentioned states such as Wyoming, Delaware or Nevada.
If you are a small player and the above items aren't as important, you will likely be better off creating the LLC in the state where you are doing business in.
Best of luck.
Basit Siddiqi CPA4.979 Reviews
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