Entity Set Up: TX or WY?

26 Replies

Hi BP,

I am very new to entity world here. However, I have recently been looking into asset protection for our rental properties. 

Two companies came up 1) Andreson Advisors 2) Royal Legal Solutions. 

Anderson set up a holding company in Wyoming which owned by a living trust. Then each property is individually owned by individual LLC that owned by the WY holding company.

Royal Legal set up a Series LLC in TX which owned by a living trust (I believe), then each property is owned by individual LLC that owned by the TX Series LLC. One of the thing that sounds attractive is that when comes time to file the tax return, this system allows investors to file with only one entity, which is the TX Series LLC.

Both companies have estate planning and SOLO 401K offered which is the same. I'm just more curious about WY or TX - what really are the differences in these two if any?

If you have experience about entity set up - please chime in :)

Lynn

Originally posted by @Lynn T. :

Hi BP,

One of the thing that sounds attractive is that when comes time to file the tax return, this system allows investors to file with only one entity, which is the TX Series LLC.

Lynn

 Lynn,

the IRS sdoes not recognize the LLC as a tax entity. When you establish the LLCs, you will be asked to designate how the LLS is to be treated on you federal income tax return. Your options are corporation, partnership and disregarded entity (which is the same as a sole proprietorshipO.

If you elect disregarded entity, and if the LLCs are solely engaged in a rental property activity, then as far as the IRS is concerned, you would report all the rental income and expenses on your personal Schedule E (1040) as if the LLCs did not exist.  

@Dave Toelkes is correct - another way of saying the LLC is a legal entity with no particular tax benefit. The difference between Series LLC and regular LLC is that you will have to open, maintain and file state and/or federal tax for each individual LLC you have (and often that goes one-to-one with properties, unless you want to deal with properties per LLC distribution issues), vs. just one for a Series-LLC. Of course, Anderson will be glad to sell you another LLC when you get a property; with a Series-LLC, you just issue an internal document and you have a new child Series-LLC to use.

I think Wyoming LLC has an additional layer of anonymity/privacy - Wyoming does not require the manager nor the members of a Wyoming LLC to be listed on a public database. But that might be moot point if you have the living trust on top of it.

And both might be moot to you, since you are in California and LLCs are very expensive in CA ($800/LLC/annually). I think there is another option - Delaware Trust - that might be a better option for CA investors (but also more complicated/expensive).  And for that, you need specialist help.

But before you go for complicated and expensive entity structures...do you need them? Do you have that much equity (not property) and/or cash flow to protect? Or other personal assets not covered through homestead and otherwise? Have you covered all the other aspects of risk mitigation? Do you do your own property management or outsource all operations? Here is a diagram to help you with these questions:

I wouldn't ask anyone other than your accountant (hopefully a real estate friendly one) for what the different options would entail and how best to do it. No offense to anyone on here, but if someone gives you even a smidge of bad advice, you could have a lot of trouble. Even if an accountant chimes in on here and answers, they don't know your specific situation financially and otherwise so I still wouldn't make a decision based off what they say. This should be a conversation offline with your accountant.

Originally posted by @Dave Toelkes :
Originally posted by @Lynn T.:

Hi BP,

One of the thing that sounds attractive is that when comes time to file the tax return, this system allows investors to file with only one entity, which is the TX Series LLC.

Lynn

 Lynn,

the IRS sdoes not recognize the LLC as a tax entity. When you establish the LLCs, you will be asked to designate how the LLS is to be treated on you federal income tax return. Your options are corporation, partnership and disregarded entity (which is the same as a sole proprietorshipO.

If you elect disregarded entity, and if the LLCs are solely engaged in a rental property activity, then as far as the IRS is concerned, you would report all the rental income and expenses on your personal Schedule E (1040) as if the LLCs did not exist.  

David - Thanks for a reminder. I reviewed my tax return and found that I did choose to disregard the entity, however, I still have to file 1065 Form and K-1 which cost me $350 to have my CPA do.  I will check with my CPA on this. Thanks for your opinion.

Originally posted by @Costin I. :

@Dave Toelkes is correct - another way of saying the LLC is a legal entity with no particular tax benefit. The difference between Series LLC and regular LLC is that you will have to open, maintain and file state and/or federal tax for each individual LLC you have (and often that goes one-to-one with properties, unless you want to deal with properties per LLC distribution issues), vs. just one for a Series-LLC. Of course, Anderson will be glad to sell you another LLC when you get a property; with a Series-LLC, you just issue an internal document and you have a new child Series-LLC to use.

I think Wyoming LLC has an additional layer of anonymity/privacy - Wyoming does not require the manager nor the members of a Wyoming LLC to be listed on a public database. But that might be moot point if you have the living trust on top of it.

And both might be moot to you, since you are in California and LLCs are very expensive in CA ($800/LLC/annually). I think there is another option - Delaware Trust - that might be a better option for CA investors (but also more complicated/expensive).  And for that, you need specialist help.

But before you go for complicated and expensive entity structures...do you need them? Do you have that much equity (not property) and/or cash flow to protect? Or other personal assets not covered through homestead and otherwise? Have you covered all the other aspects of risk mitigation? Do you do your own property management or outsource all operations? Here is a diagram to help you with these questions:

 Thanks for great inputs here. This subject is very comprehensive and this chart is very helpful. It seems like I will have to ask more specific question to the lawyer and cpas. Thanks for a great tips. Do you have Asset Protection entity set up yourself?

Originally posted by @Ali Boone :

I wouldn't ask anyone other than your accountant (hopefully a real estate friendly one) for what the different options would entail and how best to do it. No offense to anyone on here, but if someone gives you even a smidge of bad advice, you could have a lot of trouble. Even if an accountant chimes in on here and answers, they don't know your specific situation financially and otherwise so I still wouldn't make a decision based off what they say. This should be a conversation offline with your accountant.

 I agreed. It didn't incur to me to talk to my CPA. Thanks for the tip. 

Wow. My 1065s take me about 20 minutes and that includes the k-1s.  Mine are for commercial apt buildings.  Are you talking about houses when you say 'rental properties?  Will have to up what I pay myself. LOL  Wonder what I should charge myself for the 1120s?  Whatever.

But the fun continues.... I believe each foreign entity will also cost you $800+ per year in CA, no?  Plus registered agent fees in the state you choose?  Not big, but still a pain.  

If rental houses were so much liability,  why do companies insure them for $300-$500k in liability protection + structure replacement for like 50 measly dollars a month?      Asset protect away if you like, I just hate seeing people get ripped off.

Originally posted by @Caleb Heimsoth :
@Lynn T.

The best llc is no llc. You’ll spend a fortune maintaining this structure

Caleb, curious why you promote the position that "the best LLC is no LLC" ?? Whats the basis of this advice? You just threw out a dismissive one-liner to someone asking for advice.

I really should have a brochure or blog to reference for this question.

Entity structures are state creatures under state law; IRS tax designations (s- or c-corp, or disregarded) are under federal law.

In Texas, the only state in which I am licensed, foreign entities (an entity not created in Texas) must be domesticated in Texas. So a WY LLC would have to register in TX to do business here. You can buy and sell without doing this, and you can defend against suits, but you would not be able to bring its claims - and an eviction is a law suit.

Trusts offer no protection or limit on liabiity, merely makes it harder to determine who the real owners in interest are.  A court order will reveal that, though.

How many entities do you need? Depends on your appatite for risk. Usually people that say you need an LLC for each property are people who make money setting up LLCs.

Originally posted by @Matthew McNeil :
Originally posted by @Caleb Heimsoth:
@Lynn T.

The best llc is no llc. You’ll spend a fortune maintaining this structure

Caleb, curious why you promote the position that "the best LLC is no LLC" ?? Whats the basis of this advice? You just threw out a dismissive one-liner to someone asking for advice.

The llc fees, registered agent fees etc will be a lot.  There’s a million threads in this subject to. 

@Lynn T. Also since I was called out for giving a 1 liner, Let’s do specifics. You live in CA. Any llc you make anywhere will cost you 800 a year to the state. Then registered agent fees in the state you register in, Probably around 100. If this complicates your tax return (it could depending on the state) your cpa will charge more. Then you may have annual filing fees for the state you do business in. So let’s say you want to make a Wyoming llc and go buy property in TN. I looked at this structure, that’s why I used this example. You’ll have 50 annually to the state of WY, another 100 to the agent in TN. 800 to the state of CA and another 300 annually to the state of TN for a filing fee, plus the 300 or so to set it up. My cpa would also charge another 100 because my tax return gets more complicated. So you’d be at 800, 50, 100 and 300 minimum. Probably have to have a registered agent in WY too. So needless to say likely not worth it. Also most the people on these threads are attorneys or cpas who sell these services. So be careful who you listen to.
@Lynn T. And in TN your taxes go up with an llc too. So maybe if you go somewhere like OH which has no On going llc fees but you can see most states have annual fees and that coupled with the CA 800 fee will likely make this a waste of money

@Lynn T.

California does not recognize series LLCs.  If you are managing the LLCs from California and "doing business" in California, each one will need to register as "foreign" in CA and pay the $800 minimum tax and associated filing fees.  You should seek out an accountant or lawyer familiar with CA laws as CA is kind of its own beast when it comes to taxes.  Good luck!

*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 a CPA-client relationship.

@Lynn T. In relation to what @Ali Boone mentioned, she is right - you should take with a big grain of salt all the advice you get for free, from the internet. But at the same time, you do need to educate yourself and learn how to use all the tools available to you in your REI toolbox (be that insurance, or management, or financing, etc.) and how they work together (or not) and complement each other. There is no absolute answer or solution, so you need to be aware of options available to you in order to choose the one that suits you. The professional (lawyer, CPA, title officer, lender) that knows your business, plans, strategies and goals intimately, is reasonable priced and proactively counsels you does not exist, it's an unicorn - most of the time the advice you'll get from them will be as good as your question, and even then, their advice will the one producing the most for them at the lowest risk, also for them. Not to mention, the CPA will not answer any legal questions and send you to the lawyer, and the lawyer will send you to the CPA for tax questions, leaving you alone to mesh things together and figure out how and what works best for your situation. So learn as much as you can so you know your options and be able to recognize bad advice even from someone with a framed diploma over their desk.

As for your question - yes, I do have AssPro in place - I choose to go with Series-LLC with properties in land trusts at the bottom and a living trust at the top, and a separate property management LLC as the operations public facing entity.

Another way to look at this is from the perspective of insurance, as asset protection is insurance against litigation. If, let's say, for your 300K property you pay an annual insurance of 1K just in case it might burndown, then maybe it might be worth to pay another $500 to close the litigation risk hole. But only you can judge that - depending on your risk threshold, at what equity level the cost of the asspro insurance makes sense. 

I go by the 2% equity-cost ratio rule - for example, if it costs 1.5K to setup asspro and 500 annually in expense associated with that (maintaining the entity, registered agent, extra cost from cpa) for a 2K cost, then I would look to put that in place when I pass the 100K level in equity in my property (note I said equity, not value of property).

It's your "baby", how you grow it depends on you, helmet or no helmet. But if you want more "parenting" advice and see what others think in this arena, here are other related threads of possible interest:

509923-when-has-an-llc-actually-saved-your-assets

553185-rental-properties-and-law-suits

560036-asset-protection-success-stories-are-there-any

607544-been-sued-please-share

Originally posted by @Costin I. :

@Lynn T. In relation to what @Ali Boone mentioned, she is right - you should take with a big grain of salt all the advice you get for free, from the internet. But at the same time, you do need to educate yourself and learn how to use all the tools available to you in your REI toolbox (be that insurance, or management, or financing, etc.) and how they work together (or not) and complement each other. There is no absolute answer or solution, so you need to be aware of options available to you in order to choose the one that suits you. The professional (lawyer, CPA, title officer, lender) that knows your business, plans, strategies and goals intimately, is reasonable priced and proactively counsels you does not exist, it's an unicorn - most of the time the advice you'll get from them will be as good as your question, and even then, their advice will the one producing the most for them at the lowest risk, also for them. Not to mention, the CPA will not answer any legal questions and send you to the lawyer, and the lawyer will send you to the CPA for tax questions, leaving you alone to mesh things together and figure out how and what works best for your situation. So learn as much as you can so you know your options and be able to recognize bad advice even from someone with a framed diploma over their desk.

As for your question - yes, I do have AssPro in place - I choose to go with Series-LLC with properties in land trusts at the bottom and a living trust at the top, and a separate property management LLC as the operations public facing entity.

Another way to look at this is from the perspective of insurance, as asset protection is insurance against litigation. If, let's say, for your 300K property you pay an annual insurance of 1K just in case it might burndown, then maybe it might be worth to pay another $500 to close the litigation risk hole. But only you can judge that - depending on your risk threshold, at what equity level the cost of the asspro insurance makes sense. 

I go by the 2% equity-cost ratio rule - for example, if it costs 1.5K to setup asspro and 500 annually in expense associated with that (maintaining the entity, registered agent, extra cost from cpa) for a 2K cost, then I would look to put that in place when I pass the 100K level in equity in my property (note I said equity, not value of property).

It's your "baby", how you grow it depends on you, helmet or no helmet. But if you want more "parenting" advice and see what others think in this arena, here are other related threads of possible interest:

509923-when-has-an-llc-actually-saved-your-assets

553185-rental-properties-and-law-suits

560036-asset-protection-success-stories-are-there-any

607544-been-sued-please-share

How do you et this done? - "I choose to go with Series-LLC with properties in land trusts at the bottom and a living trust at the top, and a separate property management LLC as the operations public facing entity."

Originally posted by @Katie Lepore :

@Lynn T.

California does not recognize series LLCs.  If you are managing the LLCs from California and "doing business" in California, each one will need to register as "foreign" in CA and pay the $800 minimum tax and associated filing fees.  You should seek out an accountant or lawyer familiar with CA laws as CA is kind of its own beast when it comes to taxes.  Good luck!

*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 a CPA-client relationship.

Katie, That is absolutely good to know. I have a lot of research to do. Thanks for pointing it out.

Originally posted by @Costin I. :

@Lynn T. In relation to what @Ali Boone mentioned, she is right - you should take with a big grain of salt all the advice you get for free, from the internet. But at the same time, you do need to educate yourself and learn how to use all the tools available to you in your REI toolbox (be that insurance, or management, or financing, etc.) and how they work together (or not) and complement each other. There is no absolute answer or solution, so you need to be aware of options available to you in order to choose the one that suits you. The professional (lawyer, CPA, title officer, lender) that knows your business, plans, strategies and goals intimately, is reasonable priced and proactively counsels you does not exist, it's an unicorn - most of the time the advice you'll get from them will be as good as your question, and even then, their advice will the one producing the most for them at the lowest risk, also for them. Not to mention, the CPA will not answer any legal questions and send you to the lawyer, and the lawyer will send you to the CPA for tax questions, leaving you alone to mesh things together and figure out how and what works best for your situation. So learn as much as you can so you know your options and be able to recognize bad advice even from someone with a framed diploma over their desk.

As for your question - yes, I do have AssPro in place - I choose to go with Series-LLC with properties in land trusts at the bottom and a living trust at the top, and a separate property management LLC as the operations public facing entity.

Another way to look at this is from the perspective of insurance, as asset protection is insurance against litigation. If, let's say, for your 300K property you pay an annual insurance of 1K just in case it might burndown, then maybe it might be worth to pay another $500 to close the litigation risk hole. But only you can judge that - depending on your risk threshold, at what equity level the cost of the asspro insurance makes sense. 

I go by the 2% equity-cost ratio rule - for example, if it costs 1.5K to setup asspro and 500 annually in expense associated with that (maintaining the entity, registered agent, extra cost from cpa) for a 2K cost, then I would look to put that in place when I pass the 100K level in equity in my property (note I said equity, not value of property).

It's your "baby", how you grow it depends on you, helmet or no helmet. But if you want more "parenting" advice and see what others think in this arena, here are other related threads of possible interest:

509923-when-has-an-llc-actually-saved-your-assets

553185-rental-properties-and-law-suits

560036-asset-protection-success-stories-are-there-any

607544-been-sued-please-share

 Hi Costin, Thanks for the enormous help. I will have to do more researches. but thanks to all the post that points me to the right direction.

@Isaac Agbolosoo

While just about anyone could probably file the necessary articles with the secretary of state, the purpose of creating an entity usually includes some liability protection that depends on proper setup and use of the entity. A suitable operating agreement and guidance on how to maintain and administer the structure is often required for the entity to serve its purpose. Not everyone who can read and write will have the knowledge to get all of this right.