Out-Of-State Series LLC require Multiple California Nexus Costs?

Question

I'm wondering: if I do a Series LLC in a different state to hold multiple investment properties, and I reside in California, will I have to pay the California Nexus FTB Cost ($800 registering foreign entity) for each "child LLC" within the Series LLC, or could I have multiple properties under the series LLC and only pay ONE $800 Nexus Cost?

Scott Smith · Answer

@Aaron Moayed

A different method that I use for my investors that live in CA a DST (Delaware Statutory Trust) vs the Series LLC  instead of a Series LLC.  The DST is not obligated to pay the $800 franchise tax, 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.

If you would like more information please feel free to leave a reply or DM.

- Scott

Michael Plaks · Answer

Or rather... had you worked with a good tax advisor... ;)

Katie L. · Answer

@Aaron Moayed

Most likely, yes, you would owe the $800 for each entity doing business in CA.

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.

This article goes into a lot of the considerations about whether to form an LLC or not: https://www.mmpph.com/wp-content/uploads/2019/04/May-2019-newsletter.pdf

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.

*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.

Aaron Moayed · Answer

@Katie Lepore,

I see. Thank you for the response, and that PDF was very helpful — thanks for writing it.

Jay Hinrichs · Answer

shoot I just closed on today and had I known that I would not have put it in my LLC..  thanks.  next time..

Aaron Moayed · Answer

@Jay Hinrichs I asked the same question and the response I got was only if you have an LLC/Corp. personal name does not require it

Jay Hinrichs · Answer

if you own the property in your personal name  say do a flip in CA or  rental in CA or your a CA resident do you still owe the 800.00 or is that only for LLC and corps.. ???

Aaron Moayed · Answer

@Christopher Smith

What are the "other reasons" you're doing it the way you're doing it?

Your umbrella policy is just one that covers all properties?

Would your strategy still work if you started branching out into other states?

Thanks for the responses.

Christopher Smith · Answer

From the CA FTB Website:

Series Limited Liability Company (Series LLC)

A Series LLC is a new form of LLC that may be formed under the laws of some states. A series LLC is a master LLC whose organizing document provides for separate sub-units (series), which operate as independent LLCs. California law does not allow for a Series LLC to be formed in California. However, a Series LLC that is formed under the laws of another state may register with the California Secretary of State and transact business in California.

Key Features

• Each unit has its own owners (members) and may be managed separately from the master LLC and other units.
• Each unit must maintain separate books and records.
• As with a regularly formed LLC, the owners (members) of each unit are not financially responsible for the unit’s debts and obligations.
• A unit may conduct part of the business of the master LLC, or may conduct a wholly different business.
• Each unit has its own assets and liabilities. The members of each unit are treated under the laws of the state where the master LLC is formed as owning an interest in only that unit, and have no rights as members of one unit in the assets or income of any other unit.
• Each unit is liable only for its own debts and obligations. In general, creditors of one unit may only make claims against the assets of that unit.

The Franchise Tax Board has taken the position that if each unit has the features listed above under the laws of the state where the Series LLC was formed, then each unit will be treated as a separate entity for filing and tax purposes. In that case, the same filing guidelines and estimated taxes that apply to a regular LLC will apply to each unit of a Series LLC.

I have rental properties in Ohio, and for the above reason (and various others) I don't use LLCs (I have regular property liability insurance on each + an overall umbrella policy). Too me its much more efficient and from a practical standpoint just as effective.

Out-Of-State Series LLC require Multiple California Nexus Costs?

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