Tiered LLC vs LLC/Revocable Trust (Liability or Identity Issues)

4 Replies

I reside in California and am organizing myself to invest out of state. I have several markets in mind, but I have not decided which state I will be investing in. I plan to create one or more LLC's in the investment state to hold title to the properties (the operating LLC's). What are the pro/cons of holding the operating LLC's in a separate LLC (formed under a state that allows for owner anonymity (WY, NV, etc)) vice owning the operating LLC's in a revocable trust (formed under CA law, with me as settlor and trustee)? It would be cheaper to establish and manage the structure without the middle holding company LLC, but I may be missing a big "gotcha" if a black swan event occurs.

I appreciate any opinions or advice.

@Rusty McGeehan

Couple of thoughts for your consideration/discussion with your counselors:

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. CA does not recognize series LLCs so be careful in how many LLCs you are forming.

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 (though that state may not have income taxes). 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. So even if you pick a state with stronger protections like WY or NV, the cause of action arose in the state where the tenant fell, so likely that the court where the accident happened would have jurisdiction. 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. It also is helpful to have a California LLC in case you ever sell that property and move into another state so that you do not need to form a new LLC altogether with new operating agreement, just re-register in the new state as a new foreign LLC. CA isn't always the right answer, so these are all things to discuss with your counsel. Everyone's situation is different.

In California, it becomes almost essential to have a living trust/family trust to avoid probate. The limits are pretty low before a decedent’s estate is subject to probate and the process is very costly and time consuming. Another thing to discuss with your attorney.

*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.

Originally posted by @Rusty McGeehan :

Great info, thanks @Katie Lepore .  Sorry for the slow reply - I was offline for a few days.  You were the only commenter, and seemed to have nailed the response!

Katie thanks for sharing the detailed response.

I have seen investors form a limited partnership with General Partner as a Corp. Of course this might not be best for you, but something to keep in mind if paying 800 for every LLC creeps on you.

@Rusty McGeehan

I completely agree with Katie. In addition a strategy that works well for most of my CA investors is to use a DST. The DST is not obligated to pay the $800 franchise tax mentioned above, and can contain as many assets as you like. The DST is viewed as an estate planning tool, and therefore exempt from the far-reaching corporate tax laws set forth by California's FTB. A properly set-up DST will both protect your assets and bypass the burdensome franchise tax that would be levied against a Series LLC.

The Delaware Act expressly provides that “[n]o creditor of the beneficial owner shall have any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the statutory trust.” 12 Del. C. §3805(b). The title to trust property may be vested in one or more trustees, but shall not be subject to claims against the trustee which are unrelated to the statutory trust.

I am happy to talk more about some different strategies that you may use to have asset holding vs shell operating companies if you would like. 

- Scott