Structuring CA rentals + a new STR for liability protection and tax efficiency, LLCs

[Sushil Gupta]

Looking for guidance from folks who have structured a small CA portfolio.

Current situation:

- I own few long-term rentals, all in California, held in my name & in a trust. I have an umbrella policy for them. 

- I am now buying a short-term rental (Airbnb), also in CA, also closing in my name.

- All properties have a mortgage 

My focus is the Airbnb specifically, because a guest-facing rental feels like a different liability animal than my long-term tenants

Questions:

Does the STR need its own LLC for its protection. Basically Airbnb home stays on my name, and I run Airbnb via LLC. If so what things do I need to take care of?

Does LLC provide any specific tax benefit?

[Katie Balatbat]

@Sushil Gupta

There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc. Same goes for number of LLCs and what to fund them with, since bear in mind that CA tends to be more cumbersome and expensive to have LLCs than other states.

California is generally more involved 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 may be deemed to be "doing business" in California and therefore maybe subject to CA taxes. California charges a minimum tax of $800 a year per LLC doing business in the state, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you may 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 may need to pay registration and filing fees in at least 2 states if you don't buy CA property as a CA resident.

Any lawsuits should in theory be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced, some debate as to SMLLC). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. Or, a charging order may be granted. If you have a loan, you may wish to look into due-on-transfer clauses.

If you're going the umbrella insurance route, perhaps see if it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.

Creating an LLC in California could cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation. California does not recognize series LLCs. You'll also want to coordinate with your estate plan, and consider getting an estate plan if you do not yet have one in place.

These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.

*This post does not create an attorney-client or CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.