Legal Entities For Out of State

29 Replies

I think this topic has been discussed a bit ad nauseam but I couldn't find a thread that dealt with it directly with recent discussions.Following the latest discussions regarding out of state rentals,   I was wondering what everyone is doing with the legal entities with out of state properties.   Sole proprietorship all around?  LLC for each state/city?  

Interested in what the BP community thinks on this topic.

Thanks,
Jeff Smith

I've had Michigan LLCs own properties in other states and have had Texas LLCs for properties there, while living in Michigan. Either way it is kind of a pain. In most cases you are going to have to have to file the state LLC paperwork and in the other state file the LLC as a registered foreign corporation. You will likely also need to have a registered agent in the state where you do not live.

In most cases, I stopped putting properties in LLCs and shifted focus to protection via insurance.   I beefed up my individual property liability to $500K and then bought a $2M umbrella policy off of my homeowners policy.  That strategy is much easier to execute, avoids any due-on-sale issues, makes it easier to refinance, and still allows me to sleep well at night.

Great advice @Greg Scott !   I like the idea of protection with insurance rather than legal entities as it is.  Love the idea of an umbrella policy.   Will check into that for sure.   I currently live in California but buy in Missouri (home state).  

For liability protection, most people either own their rentals in LLCs or they just own it in their own names and get an insurance policy on it. If you go the LLC route, simply contact an attorney or legal service in the state the property is located in. Luckily for us Californians, forming and filing an LLC in any other state will be considerably cheaper than it would be for a CA LLC.

Structuring your rental portfolio with limited liability companies is much different than purchasing an insurance policy. For instance, let’s say something bad occurs at a rental property (i.e. wrongful death, fire, bad drug deal...). If your limited liability company is formed properly it takes the hit, thus protecting your personal assets and assets held by your other companies. Whereas, insurance is less predictable. You must make you have the proper coverage and for the proper amount. Regardless, you are personally liable until your insurance company pays the tap. I would much rather depend upon a limited liability company that I created than an insurance company created to collect premiums and deny coverage.

Thanks John. Considering Missouri is the state in which I will be investing (Home state) I really appreciate the insight. Do you have one LLC for each property or one single one for the properties you have in the state?

Jeff

You should have 1 LLC for each property so that you limit the liability to each property. If you have an LLC that owns 3 properties, then if a tenant sues, you have 3 properties at risk.

@Cara Lonsdale too funny.... that would be an accounting nightmare and expensive as heck you would need a tax return for each LLC.. I have seen attornies try to sell that.. reason they make money.. but in practical execution for most its simply not warrented and total over kill.

@John Spurlock as much as we would like to think LLC isolates the owner from liability that simply is not the case.. if its bad enough to get sued.. your going to get sued personally right along with your LLC.. and you may be right but you will spend thousands on motions in limini ...

LLC's are great for many reasons and I have a bunch of them.. but its all with different partners.. but in a single member LLC its easily pierced. Insurance is mandatory if your going to go in the landlording game.

Personally, having one LLC for each property sounds like a very crazy idea. There's expenses in forming each LLC, in which some states it could be pricey. Let's not forget that you have to pay yearly fees to the state Corporation Commission and the register agent fee per LLC in each state. If you have 50 LLCs for 50 properties, it adds up very quickly. Businesses get sued all the time, yet they don't lose all their assets over 1 lawsuit.

Originally posted by :

too funny.... that would be an accounting nightmare and expensive as heck you would need a tax return for each LLC.. I have seen attornies try to sell that.. reason they make money.. but in practical execution for most its simply not warrented and total over kill.

 No Jay. LLCs pass through your personal income taxes, so it is not an accounting nightmare, and individual tax returns are not required for each property. 

CA charges $800 yearly fees for any LLC (in state or out of state). Since you live in CA, you will have to pay this for each LLC you open in MO.

@Cara Lonsdale  LLCs can be set up as pass through entities but that is not always the case.  Some LLCs must file tax returns.   

Setting up 1 LLC per property can actually increase your risk exposure. You must be certain to run the LLC as an independent entity, ideally each one with its own bank account and books. If you fail to operate them correctly a lawyer can easily argue to pierce the corporate veil and disregard your LLc structures entirely. So, if you are going to go that route you are wasting money unless you put in all the other effort to maintain the entity correctly. If you have more than a handful of properties, that gets really tedious really quickly.

@Cara Lonsdale I understand pass through income have been doing it for 30 plus years in LLC

but each has to be registered and pay the fee.. and each has to file a tax return every year and each needs its own set of books.. this is a lot of wasted time effort and money for a simple rental.

now 100 unit apartment building or some other substantial asset I can see it.. but just holding SFR rentals no way... way over the top not necessary and not going to protect you in a litigation action either.

@Jeffrey Smith

When it comes to using LLCs, there are several factors you want to consider. Among other things, you want to think about: (1) the fair market value of each property; and (2) whether you have enough net worth to require a substantial amount of asset protection. 

On the first point, let's say you invest in 200-unit apartments that are worth millions of dollars. In those cases, it's probably worth the cost and hassle of forming an LLC for each of those apartments. By comparison, let's say you invest more in turnkey apartments in the Midwest that all cost less than $100k each. If so, does it really make sense to have a separate LLC for each one? Reasonable people can disagree but I personally wouldn't create an LLC for each one.

The second point is tricky to discuss since there are a lot of factors. But as a general rule, most of us do not have enough assets to require "serious" asset protection. Why that's the case is a bit complicated. One of the main reason is that getting a judgment against someone is VERY different from actually collecting that judgment. So when plaintiff attorneys evaluate what cases to take on a contingency basis, they tend to stick with cases where the defendants clearly can pay (e.g. hospitals, big corporations, etc.). Most of us do not fall into that category. 

On other points: 

  • Agree with @Greg Scott that setting up a lot of LLCs can increase exposure. Most people struggle to keep corporate formalities with one LLC. Adding more to the mix tends to exacerbate the issues.
  • @Avi Garg makes a good point that some states require you to pay decent money for each LLC.
  • @Jay Hinrichs is correct that protection offered by a single-member LLC is limited. The fact that you have an LLC doesn't always mean that it will protect you and your assets from all your actions. As a general rule, if you personally take the action on behalf of an LLC, you increase the chances of you being held liable.
  • In terms of insurance versus LLC, I suppose the "safest" answer is to do both. But if I had to choose between the two, insurance always wins and I don't think it's close. To address the concerns that @John Spurlock raised, one answer is to use an insurance broker instead of trying to get the insurance yourself.  

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Chris K.   I would say that 90% of the people that freak out about getting sued do not have the Net equity to interest any plantiff  LOL... as the people that tend to talk about this are just starting their journeys in RE and are quite impressionable.. and its a huge leap to go from land lord to having a judgement against you for some thing..  if you get one you probably deserve it  !!!!

Originally posted by @Jay Hinrichs :

@Cara Lonsdale I understand pass through income have been doing it for 30 plus years in LLC

but each has to be registered and pay the fee.. and each has to file a tax return every year and each needs its own set of books.. this is a lot of wasted time effort and money for a simple rental.

now 100 unit apartment building or some other substantial asset I can see it.. but just holding SFR rentals no way... way over the top not necessary and not going to protect you in a litigation action either.

 If you hold rentals in another state, and collect income, you have to pay taxes in that state anyway.  So at the very least, a state return has to be filed for every state that you own property.

This is just the cost of doing business.

We understand Jay, you are a big time real estate guy with lots of experience, way beyond the level of many of the investors on here.  But for newbies, or even small time investors building their portfolio, it's a brick and mortar operation.

Holding more than 1 property into an LLC defeats the whole purpose of establishing the LLC. That is why I encouraged the idea of having each property in an LLC (this is how the attorney explained it to be the best protection for us). And honestly, once our initial Trust and LLC documents were drafted, the additional LLCs are an easy thing for me to create and file. It's a $50 fee to file here in AZ, AND they don't even require me to publish anymore. Now that the internet is a tool, many states just publish the LLCs there. Again, this is just the cost of doing business.

Having a blanket insurance policy is also a smart idea, and as your portfolio grows, I am sure that it comes more into play.  However, as mentioned above, you run the risk of the insurance company not covering items, as well as the timing for paying out a claim.  In essence, your whole real estate business is hinging on the insurance company.  This adds, yet another layer of risk, that as a small time investor, is worth considering, and weighing the options.

You know what I like about an LLC? If someone sues the LLC, the best that they can hope for is that the judge rules in their favor. Do you know what that means? If your LLC is set up properly, it means that they get to join the LLC as a member (with no say in decision making). As a member of the LLC, they get to share in the profits equally with the other members until their settlement is paid off. However, what people don't think about, is that members of the LLC also SHARE IN THE EXPENSES. Who wants to do that? NO ONE....and that is the idea.

Originally posted by @Greg Scott :

@Cara Lonsdale  LLCs can be set up as pass through entities but that is not always the case.  Some LLCs must file tax returns.   

Setting up 1 LLC per property can actually increase your risk exposure. You must be certain to run the LLC as an independent entity, ideally each one with its own bank account and books. If you fail to operate them correctly a lawyer can easily argue to pierce the corporate veil and disregard your LLc structures entirely. So, if you are going to go that route you are wasting money unless you put in all the other effort to maintain the entity correctly. If you have more than a handful of properties, that gets really tedious really quickly.

I understand. The way our structure was set up, the money is in it's own LLC. So, it goes TRUST-----------> Holding Company LLC (the money) --------> Property LLC. So, setting up bank accounts isn't necessary because the money is all in 1 LLC, and money can't be sued (it doesn't harm anyone).

I am no attorney.  I just am offering my experience to the OP as it was set up for us here in AZ by a competent attorney.

I also agree that blanket insurance is a good idea.  I just don't think it is without it's flaws, that are also worth mentioning.

Thanks for your insight!

Originally posted by @Cara Lonsdale :
Originally posted by @Jay Hinrichs:

@Cara Lonsdale I understand pass through income have been doing it for 30 plus years in LLC

but each has to be registered and pay the fee.. and each has to file a tax return every year and each needs its own set of books.. this is a lot of wasted time effort and money for a simple rental.

now 100 unit apartment building or some other substantial asset I can see it.. but just holding SFR rentals no way... way over the top not necessary and not going to protect you in a litigation action either.

 If you hold rentals in another state, and collect income, you have to pay taxes in that state anyway.  So at the very least, a state return has to be filed for every state that you own property.

This is just the cost of doing business.

We understand Jay, you are a big time real estate guy with lots of experience, way beyond the level of many of the investors on here.  But for newbies, or even small time investors building their portfolio, it's a brick and mortar operation.

Holding more than 1 property into an LLC defeats the whole purpose of establishing the LLC. That is why I encouraged the idea of having each property in an LLC (this is how the attorney explained it to be the best protection for us). And honestly, once our initial Trust and LLC documents were drafted, the additional LLCs are an easy thing for me to create and file. It's a $50 fee to file here in AZ, AND they don't even require me to publish anymore. Now that the internet is a tool, many states just publish the LLCs there. Again, this is just the cost of doing business.

Having a blanket insurance policy is also a smart idea, and as your portfolio grows, I am sure that it comes more into play.  However, as mentioned above, you run the risk of the insurance company not covering items, as well as the timing for paying out a claim.  In essence, your whole real estate business is hinging on the insurance company.  This adds, yet another layer of risk, that as a small time investor, is worth considering, and weighing the options.

You know what I like about an LLC? If someone sues the LLC, the best that they can hope for is that the judge rules in their favor. Do you know what that means? If your LLC is set up properly, it means that they get to join the LLC as a member (with no say in decision making). As a member of the LLC, they get to share in the profits equally with the other members until their settlement is paid off. However, what people don't think about, is that members of the LLC also SHARE IN THE EXPENSES. Who wants to do that? NO ONE....and that is the idea.

 I thought I had seen it all, but this is the first time I am seeing someone trying to school Jay Hinrichs on real estate. That's like trying to show the likes of Brady and Manning how to throw football. 

Are you seriously suggesting that people have 20 different LLCs for 20 properties they own. Even if its $50 to renew. That's $1000 wasted money. And you are just thinking in terms of your home state of AZ. Try going to one of these liberal cesspools like California, and you are talking something like $800 per year, per LLC. Plus you want to do a business in another state, your LLC will have to be registered as a foreign entity in that state. Now you are not paying your $50, but whatever that state (where the property is located) dictates. All this nonsense adds NO value to your business. The protection can achieved by having really good insurance.

Additionally, not sure if you are aware but most lenders don't lend traditional govt backed mortgages to LLCs. So the mortgage is still in your name. Its not going to take the judge more than 10 seconds to pierce that veil of LLC if you do something really stupid and need to be held liable.

I hope that should be enough for now to make a point as to how silly it is to hold each property in its own LLC

Originally posted by @Chinmay J. :
Originally posted by @Cara Lonsdale:
Originally posted by @Jay Hinrichs:

@Cara Lonsdale I understand pass through income have been doing it for 30 plus years in LLC

but each has to be registered and pay the fee.. and each has to file a tax return every year and each needs its own set of books.. this is a lot of wasted time effort and money for a simple rental.

now 100 unit apartment building or some other substantial asset I can see it.. but just holding SFR rentals no way... way over the top not necessary and not going to protect you in a litigation action either.

 If you hold rentals in another state, and collect income, you have to pay taxes in that state anyway.  So at the very least, a state return has to be filed for every state that you own property.

This is just the cost of doing business.

We understand Jay, you are a big time real estate guy with lots of experience, way beyond the level of many of the investors on here.  But for newbies, or even small time investors building their portfolio, it's a brick and mortar operation.

Holding more than 1 property into an LLC defeats the whole purpose of establishing the LLC. That is why I encouraged the idea of having each property in an LLC (this is how the attorney explained it to be the best protection for us). And honestly, once our initial Trust and LLC documents were drafted, the additional LLCs are an easy thing for me to create and file. It's a $50 fee to file here in AZ, AND they don't even require me to publish anymore. Now that the internet is a tool, many states just publish the LLCs there. Again, this is just the cost of doing business.

Having a blanket insurance policy is also a smart idea, and as your portfolio grows, I am sure that it comes more into play.  However, as mentioned above, you run the risk of the insurance company not covering items, as well as the timing for paying out a claim.  In essence, your whole real estate business is hinging on the insurance company.  This adds, yet another layer of risk, that as a small time investor, is worth considering, and weighing the options.

You know what I like about an LLC? If someone sues the LLC, the best that they can hope for is that the judge rules in their favor. Do you know what that means? If your LLC is set up properly, it means that they get to join the LLC as a member (with no say in decision making). As a member of the LLC, they get to share in the profits equally with the other members until their settlement is paid off. However, what people don't think about, is that members of the LLC also SHARE IN THE EXPENSES. Who wants to do that? NO ONE....and that is the idea.

 I thought I had seen it all, but this is the first time I am seeing someone trying to school Jay Hinrichs on real estate. That's like trying to show the likes of Brady and Manning how to throw football. 

Are you seriously suggesting that people have 20 different LLCs for 20 properties they own. Even if its $50 to renew. That's $1000 wasted money. And you are just thinking in terms of your home state of AZ. Try going to one of these liberal cesspools like California, and you are talking something like $800 per year, per LLC. Plus you want to do a business in another state, your LLC will have to be registered as a foreign entity in that state. Now you are not paying your $50, but whatever that state (where the property is located) dictates. All this nonsense adds NO value to your business. The protection can achieved by having really good insurance.

Additionally, not sure if you are aware but most lenders don't lend traditional govt backed mortgages to LLCs. So the mortgage is still in your name. Its not going to take the judge more than 10 seconds to pierce that veil of LLC if you do something really stupid and need to be held liable.

I hope that should be enough for now to make a point as to how silly it is to hold each property in its own LLC

 I am not trying to school anyone.  The whole point of a forum is to provide people with your personal experience, and the results of it.  This is the way that I have my business set up.....and you are right, I don't have holdings in CA, so I can't speak to CA law (which I am pretty sure I disclosed in my post when I mention "AZ"). 

There are a few people on BP that like to bully other people when they give a contradictory opinion.  However, ALL of them are valuable here.  

And by the way..... Brady and Manning (not anymore) still answer to a coach....who I am sure can't throw as well as them, but still has valid coaching and direction to offer.  So, I chuckle at your comparison.  No one is the GOD of knowledge.  There is value in what everyone has to say here.  Maybe we could do with a few less bullies who gain up against a person who disagrees with them to offer a different way though. :)

@Cara Lonsdale   its those starting out that can least afford to spend all this money on asset protection when they have not even bought their first rental..

I get it that the lawyers sucked you into this.. many people do it.. my point is .. that its really not necessary .. creates a ton of work.. and will not protect you if you actually get sued.. if you get sued as a landlord you have done something wrong.. and if you did not.. then that is what insurance is for.

its ok to disagree with me or me with you that's what this site is all about..

and I am the first to admit I AM not THE BE ALL END ALL TO REAL ESTATE.. Simply my experinces over the years..

@Chris K.

Thank you for providing a voice from the legal community that isn't just "you should buy more entities".   There is too much of that in the industry.   We need more discussion about the balance of risks, costs, and filing requirements.

@Chris K. @Greg Scott @Jeffrey Smith

Insurance protects against different kinds of risk (e.x. negligence) than an LLC (e.x. breach of contract, fraud, gross negligence, etc.). Savvy investors look at legal structures as another form of insurance against those risks not protected by insurance, and they balance the costs associated against the equity protected. As a general rule, I wouldn't spend more than 3% as a one time cost to protect the equity...so more like flood insurance if I were to draw a parallel between the two.

For California residents, an LLC becomes expensive at $800/yr in franchise tax and still everything is in one "bucket" for litigation. For CA, I recommend using a DST since trusts are not subject to franchise tax and it allows for the asset protection and compartmentalization akin to a Series LLC. The downside is that it is expensive, $7000 - $10,000 as a one time cost from most providers who even know how to put it together which can be difficult to find.

With regards to none CA investors, you can use a Series LLC established through a State like Texas or Delaware to compartmentalize the ownership of the assets and then hold title to the property in land trusts in every other state. This avoids foreign registrations and provides anonymity in the ownership (Mr. Land Trust recommends this approach as well).

@Jeffrey Smith , many good opinions on here. I am a fan of doing both. I am planning to keep minimum equity in each property (another "asset protection" strategy) and therefore am comfortable having multiple properties (as I continue to accumulate them) in one LLC. At some point, I may get to a certain threshold where I decide to create another LLC for the next "batch" of properties. Obviously, you also want to have adequate insurance, too. I'm talking about relatively low priced SFRs. As others have said, if you're talking about a large apartment complex (or even a small-to-midsize one), it may warrant its own LLC. Let's say I accumulate 10 SFRs at an average of $100K each with 20% down on each. Initially, I'll have about $200K at risk in one entity. I'm okay with that. For someone that has a lower "risk tolerance," maybe they're only comfortable with $100K at risk - so, in that example, the form another LLC after 5 of these properties. It's going to be different for everyone. As others mentioned: you must factor in time, cost, risk, etc. Hope this helps.

I am not offering you legal advise on this and am not creating an attorney client relationship with you. This is just my personal non legal opinion. This is written for informational purpose and do not rely on this for legal advise. Now, I would say get together with BOTH your personal Real Estate CPA who knows your past and current financial history, AND your Attorney. Many options exists in how to structure your real estate investments. Generally (LLC's and S-Corps) but it all depends on lots of factors and tax consequences with your overall portfolio, situations and goals that we in this forum cannot know. It is also not just a matter of creating the separate entity, but also using that entity correctly. As if it is its own person, with its own bank account, own credit cards, etc. That way you can then truly start separating and carving out layers of separation for liability purposes. And depending on your financial situation, bank, etc, how you take title to the property. Under the corp entity or personally. Lots of factors to go over. I do see people being sued for the dumbest things, so as much as I respect @Jay Hinrichs

@Jay Hinrichs I would not gamble and take any leap of faith on not being sued. I have sued people for clients when I started out as a lawyer for the dumbest reasons because my bosses gave me the case file on my desk. Pissed off tenants have nothing to loose. You may not hav a judgment against you, but you will have legal fees to pay people like me to represent you in court. 

So, properly structure yourself taking into consideration your Attorney and CPA's advise, and get proper insurance coverage. 

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