How to structure LLC for BRRRR partnership?

Question

First of all, thank you for taking the time to read about our specific situation. In the past I have simply registered my own Oregon LLCs without much thought/effort, but it looks like this time I may need a lawyer. Before I start paying a pro by the hour, I would really appreciate some guidance from the BP community!

My good friend @Alex McIvor & I are starting a new venture together and are unsure about the best way to set up our LLC. Our goal is to use $100k in capital to buy, rehab, rent, and refinance at least two cash flowing properties in Indianapolis per year indefinitely. Thanks to the BP community we have made a lot of progress towards putting together our team and are planning a trip to Indi later this month, but now I'm getting sidetracked...

What is the best way to structure our new company? Should we form an Indiana LLC since thats where we will be investing? If so, will my partner (who is a resident of California) still have to pay the ~$800 per year California LLC tax? Should I hold my half of our new LLC in my existing Oregon LLC that I use for other real estate investments?

On a similar note, any tips on good clauses to include in an operating agreement for a venture like this?

Eamonn McElroy · Answer

@Grayson Graham

Definitely use the services of a good attorney to draft the operating agreement.  The attorney will generally have a template of the necessary language, but a CPA may have a thing or two to add.

An LLC taxed as a partnership will generally be the most advantageous entity for holding long-term rental real estate.  There may be a wrinkle or two if your partner is a CA resident and a member-manager.  CA has debatably the most aggressive department of revenue in the country.  There's nothing they won't try to tax if there's any connection to CA, no matter how slight it may be.  You and/or your partner's CPA should be able to add more color.

Grayson Graham · Answer

Based on your comment I used the keyword "member manager" in my google search and found this article (excerpts below) that verifies what your are saying:

• The LLC is commercially domiciled in California (i.e., California is the place where realistic control of the LLC’s functions is centered).

• A Montana LLC owns an apartment building in Montana that is managed by an on-site (Montana) property manager.  One of the three LLC managing members is a California resident.  The Montana LLC may be treated as “doing business” in California simply by reason of the existence of a California managing member.

So based on this it seems that, no matter where the LLC is or how it is structured, if there is a managing member living in California the LLC has filing obligations in California. The workaround would be for the California resident not to be a managing member, but that doesn't seem to be a fair solution in a partnership where two people are putting in equal funding and effort.

Gloria N Gear · Answer

Hi Grayson, I don't know the exact answer to your question, but I am a realtor in Indy working with about 40 investors and just starting to purchase my own investment properties.  I am meeting with my CPA this month with this exact question, and I have 3 good real estate attorneys here that could help advise you with Indiana structure.  If that would be helpful to you, PM me and I will get you their contact info.