Where to form an LLC

3 Replies

@Ethan Spielvogel

As a general rule, you would want an LLC in the state where the property is located to be able to make any legal action in court (eviction for instance).

However as some states have week asset protection statute (the charging order is not the sole remedy), you would then need to have this local LLC owned by another LLC in a strong state like WY.

Now because you are located in CA, you are subject to the CA regulation that will force you to pay an expensive local franchise tax on your out of state LLC. There are some ways to get around it by using a DST or some other creative entities setups.

At the end of the day, it is always a question of how much are you willing to pay for the level of asset protection you seek. Only you can decide what will make you sleep better.

@Ethan Spielvogel

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. 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. But, that is not always the right answer and you should speak with someone familiar with your personal situation to get advice specific to you.

*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.

As mentioned above, you would still be subject to the CA franchise taxes. If you were hoping to avoid those by creating an out-of-state LLC then I would recommend looking into the Delaware Statutory Trust. The DST is not obligated to pay the 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.

Just an option. I am not sure if that was what you were trying to get at with trying to form an LLC in another state. If you are wondering which state offers better protection, then I would agree with the stratgy laid out by @Katie Lepore above.