LLC formation, does it matter state of filing?

Question

Hey there. For the past few years, I've been working for my family, managing their properties pretty much full time. However, I wasn't reporting any of the income I made. I'm wanting to get started in out of state investing (I live in CA) although I need to create a track record for income for about a year to show lenders when I'll need financing. I was told to create an LLC for myself and have my income paid to the LLC so that I can report it. My question is does it matter which state I file the LLC in? California's LLC costs are pretty high.

Kyle J. · Answer

I'm not sure why you need a LLC to report your personal income. Sounds like it'd just add unnecessary expense/complexity. Regardless, what I can tell you based on the limited info provided, is that even if you do set up a LLC in another state, you won't be avoiding California's "high LLC costs".

California has a pretty broad definition of what it means to be "doing business" in this state and if you're the sole member of this LLC and you reside in California, you'll still be required to pay the $800 minimum tax to the California Franchise Tax Board.

Here's a couple articles that go into this in more detail:

https://www.llcuniversity.com/california-llc/doing-business-in-california/

https://www.corporatesecuritieslawblog.com/2014/07/is-your-out-of-state-llc-doing-business-in-california/

Kyle J. · Answer

Just an observation, but you taking out a loan on the equity in a property that your family also owns DOES expose your family to risk.  I don't think you could even do this (take out a loan by yourself when they're also on the deed), but suppose you did and you defaulted for some reason, or you ended up getting sued and getting a judgment against you.  Your family could end up losing their property through no fault of their own.  I'd say that's pretty risky.

Katie L. · Answer

@Kal Seirafi

Is the LLC you form going to hold any real property, or is this just for your business where you serve as a property manager?  Have you considered being treated as a contractor or employee?  Are your families' properties owned in an entity or are they owned individually/in a trust?  There are employment considerations for your family, and quite honestly for you as well.  Also, you need to consider the requirements for serving as a formal property manager in the Business and Professions Code depending on your duties and the types of properties.  Have you looked into whether your personal services are eligible to be an LLC in California or whether you need a personal service corporation?  You'll also want a good CPA to handle all this and to talk through the consequences such as making estimated tax payments on the income when earned.  If you plan on using the equity of a jointly owned property with your family for a loan, have you found a lender willing to do so with just your approval?  How is title held?  Do you have a co-ownership agreement?

Also, if you live in CA and manage the LLC from CA, chances are you will not be able to avoid the high CA LLC costs, even if you form in another state.

I think what you're proposing has a lot of elements to it that you likely should be discussing with a CPA and attorney your options and the consequences to each.  Your issues could span several areas of the law also that you may need multiple attorneys.  A sort of related note too, you should consider an estate plan if you do not have one yet and you are a CA resident and own real property.

*This post does not create an attorney-client or CPA-client relationship.  The information contained in this post is not to be relied upon.  Readers are advised to seek professional advice.

Basit Siddiqi · Answer

@Kal SeirafiThere are some reasons to creating an LLC, however, you haven't mentioned a valid reason why.You do not need an LLC to separate yourself from your family/family business.Regarding to compliance costs of an LLC in California, you are correct, it can be quite high.

Khaled Seirafi · Answer

@Kyle J. Thanks for your response. Just to add some more background info. I co-own a condo with my family. I'd be using the equity in this condo for any future loans. However, because my income is not high enough, I was told that I'd need my mom to sign off on any loan. The reasoning given to me by a friend to create an LLC is to separate myself from my family as a business entity. I'm not entirely sure if it makes complete sense to me, but essentially what I'm trying to do is find ways to not need to expose my family to any risk when I choose to take out any loans to use for investing.

As for filing out of state, I understand your reasoning. Thanks!

LLC formation, does it matter state of filing?

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