CA Property and TX... LLC or Trust?

Question

I currently own my primary residence in San Diego , CA and 2 duplexes in SA,TX. I would like to hold my property in the best possible way that would protect me from law suits, people knowing whom owns the property, and taxes. I am torn between setting everything up in CA where I live or TX where my investments are.  What should I do and how should I hold the property

Brandon Hall · Answer

Account Closed

I'm not an attorney, but if you go the LLC route, please consider the fees involved. CA is a unique state in that it charges an $800 minimum tax (franchise fee) if it deems your LLC is "doing business in" CA. That's on top of annual filing fees.

So even though your properties are in TX, if you set up an LLC, you will generally have to pay the $800 min. tax per LLC as CA will deem you doing business in CA. Unfortunately, CA's definition of "doing business in" is very broad and wide encompassing. Simply answer a few phone calls from a property manager can qualify you for this.

That said, you should speak to an attorney to hash it out on the liability side.

https://www.ftb.ca.gov/businesses/bus_structures/LLcompany.shtml

Mark B. · Answer

CA knows about foreign income because you provide them a copy of your federal return with your CA return. Non-managing minority members of LLCs can sometimes not cause the LLC to have to pay the ransom. You are guilty until proven innocent.

Mark Nolan · Answer

@Brent Boltz

Welcome to Bigger Pockets. BP is full of resources. You will find resources here from blogs to pod casts and forums. You can also send messages to members. This is one of my favorite features of Bigger Pockets especially for asking specific questions.

Julie Falen · Answer

To Brent Boltz, my strong opinion is that the best way to anonymously hold proeprty (Anonymous to the public or lawyers anyway) is in a land trust. There is a lot of settled land trust law throughout the states. Ilinois and some east coast states are usually the best for creating your land trust.

You want to have the LLC be the BENEFICIARY of the land trust - then no one knows who owns it, it is protected from insurance and other lawsuits, nd most important of all, it is NOT a foreign corporation doing business in CA - it is merely a name on a deed - which ideally will be held by a trusted friend in a state far away from California.

Check out Randy Hughes and his website for land trust.  Mr. Land Trust is his nickname.

He is one of the "gurus" who really has a great product, lots of freebies, lots of knowledge, and lots of suggestions and instructions on how to best protect your self and your property.

Julie Falen · Answer

Hi Justin -

I, too, am not a lawyer, but I have had a similar conversation about LLCs form out of state. If you have any sort of bank account here in CA and your LLC earns any money or interest or profit that you take in CA and report on your state tax return (either/or) the state of California will find out about it eventually.  Ask me how I know....

Brandon is correct. Your TX LLC is considered a foreign corporation and if you are doing any business for ite here, or have monies that pass thru CA, you have to pay the annual franchise board tax.

Brandon Hall · Answer

@Justin R.

It's a good question and take my advice with a grain of salt as I'm not a lawyer and one familiar with entity structuring should be consulted. It would be great if an attorney familiar with CA entity structuring could comment here as I know the topic can get quite murky.

From the way I understand it, if you are operating your rental business out of CA, by taking phone calls, banking rent checks, managing property managers/contractors, then you may deemed to be "doing business" in CA and subject to foreign entity filing.

Law firm explaining "doing business" in CA:If you have an out-of-state LLC but have headquarters or any office or "presence" (telephone number, home office, P.O. Box, etc.) in California, you may have to register that LLC or corporation as an out-of-state entity with the State of California.

http://www.methvenlaw.com/Practice-Areas/Corporate-LLCs-LLPs-Shareholders/Setting-Up-Out-of-State-Entity.html

The link below is a good article explaining the laws and providing for the following example:

"A Montana LLC owns an apartment building in Montana that is managed by an on-site (Montana) property manager.  One of the three LLC managing members is a California resident.  The Montana LLC may be treated as “doing business” in California simply by reason of the existence of a California managing member."

http://www.corporatesecuritieslawblog.com/2014/07/is-your-out-of-state-llc-doing-business-in-california/

CA explanation for when you need to file foreign entity status:

"Before transacting intrastate business in California the business must first qualify/register with the California Secretary of State. (California Corporations Code section 2105, 15909.02, 16959 or 17708.02.) California Corporations Code sections 191, 15901.02(ai) and 17708.03 define "transacting intrastate "as entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce."

http://www.sos.ca.gov/business-programs/business-entities/faqs#form-question7

Another good article on the subject:

http://www.northwestregisteredagent.com/avoid-ca-franchise-tax.html

Justin R. · Answer

@Brandon Hall If he forms the LLC in Texas with a Texas address for process service, it'd be a Texas LLC and governed under those rules.  From the CA secretary of state's perspective, it's a Texas business with income derived only from out-of-California assets and from out-of-California people.

Since he's a CA resident, he'd have to pay state income tax on the proceeds, but I don't see (A) how CA would know about the LLC and (B) why he'd have to pay the yearly CA fee.  He's not doing business in CA.

I ask because I derive income from an out of state LLC and that LLC certainly isn't paying California franchise fees, so trying to understand your reading of the situation.  Knowing you, I'm likely wrong than right here.  ;)

CA Property and TX... LLC or Trust?

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