From California, Investing out of State, Where do I register my LLC?

Question

I am in the process to register an LLC, I live in San Diego Ca. Should I register it here or in the State in that I will be investing?

Thank you

German

Michael Plaks · Answer

@German Tapia

I concur with @Rob K.: CA wants all their residents to pay $800 per year for any LLC they form anywhere. And they are pretty aggressive about it, too. There have been multiple legal challenges to this position of the FTB (California tax department, or Franchise Tax Board), but I don't believe any CA resident won such a fight. If anybody knows of a precedent, please share.

I'm not an attorney, so my opinion in legal matters is worthless. Most if not all of the attorneys I discussed it with, recommend using an LLC formed in the state where your property is. This way, if you have a legal fight, you're fully covered by that state's law. Again, it's really an attorney's question, and ideally the one licensed in both states.

And, while talking to your attorneys, have them justify the need for an LLC. There's an ongoing (and often heated) debate as to whether LLCs are necessary for investors. Just type "LLC asset protection insurance" in this forum's search box, and you will see dozens of threads on this topic.

While reading these discussions, notice whether people who share their opinions are qualified to do so. Nowadays, we're all experts in everything, thanks to YouTube and Google. I would still value an attorney's opinion above that of some know-it-all podcast host.

Katie Balatbat · Answer

@German Tapia

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.

Rob K. · Answer

It is the CA Franchise Tax Board's position that an out of state LLC owning an out of state property run by a California resident would still need to register in California:

https://www.ftb.ca.gov/forms/m...

Jeff Nash · Answer

I’m not an attorney and don’t know your full situation and all the facts and circumstances but would recommend you consult with one if you haven’t done so in the past or already.  The feedback I have seen and gotten more often than not is to form an entity in the state where you are operating.  Again though, as a CPA I let the attorneys work with clients and determine what is best as the DIY options might leave you with a void that renders the LLC (or any entity for that matter) set up ineffective and useless.

Katie Balatbat · Answer

@Sonny Dhillon

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.

Basit Siddiqi · Answer

California requires an $800 for LLC's that are doing business in California.California law suggests that managing members of an LLC that are a resident of California are considered to be doing business in California.Normally people will suggest opening up the LLC in the state where you are doing business(Normally the state where the property is located at).Others will suggest opening the LLC in a different state such as Wyoming, Nevada or Delaware for charging order protection, business friendly case law, anonymity, etc

Nate Meeker · Answer

I agree with @Katie Balatbat. I personally open LLCs in the state where my rentals are and foreign register them in CA since I live here. You can't escape the $800/year fee in CA. *Any post made by Nate Meeker, CPA is informational only. Readers are advised to engage a licensed professional who knows their situation before relying on their opinion.

Jason Malabute · Answer

Hey German! I get this question all the time from other California investors. Basically, California considers you “doing business” here if you’re managing the property from CA, so they’ll want you to pay that $800 annual franchise tax—even if your property is out of state. A lot of people in CA have tried to fight it, but the Franchise Tax Board is pretty aggressive, and they almost always win.

One thing I’ve done myself (and it’s worked well so far) is to keep my main LLC in California, which owns LLCs in other states where my properties are located. That way, I just pay the $800 for my CA LLC, and it holds the out-of-state LLCs. Other investors have done similar setups to keep things smooth with the tax board.

Sonny Dhillon · Answer

we opened escrow thursday so i do have time for llc.   My original question was either to open llc in california and do  foregin entity in the state i'm buying property or the other way around.

Sean O'Keefe · Answer

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*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

From California, Investing out of State, Where do I register my LLC?

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