Live in CA and invest in MD, Where should I file my LLC?

[Erick Chavarria]

Hi BP family, 

So I live in California and want to buy property in Maryland, (buy, rehab and hold). Will it have a tax impact if my LLC is registered in CA and doing business in MD versus having it registered in MD where the properties are?

A fellow investor I spoke to said that aside from filing fees it makes no difference. According to him: Legally: if the LLC gets sued Maryland laws would apply because that's where the lawsuit would be whether the LLC was formed in MD or CA.

Tax-wise: He says since it's a passthrough entity  I will have to pay California income taxes either way since that's where I reside. Also, MD taxes will have to be filed in either scenario because that's where the investment properties are located. 

Do yo guys agree? any thoughts will be greatly appreciated. 

[Katie L.]

@Erick Chavarria

California is a sort of beastly state 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 be deemed to be "doing business" in California and therefore 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 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 will need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will need to pay registration and filing fees in at least 2 states if you don't buy CA property. Be sure to tell your accountant that you now need to file non-resident income tax returns in each state where you own property as well. 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. 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. These are all conversations you will want to have with your attorney and CPA so that you get advice specific to your own situation.

*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.