My brother and I lost our father a couple years back. He left us some amount of money, and we already have one deal in California that is bought outright. We are looking to invest in Arizona, since it is close to him in AZ and we could check on the prop/ maintain it easier. When it comes to having two properties in two different states. How should we go about setting up this partnership?
- 1. LLC filing as a partnership holding both properties?
- 2. LLC filing as a partnership holding llcs below that each have the properties seperately?
- 3. No LLC as of right now?
Also, what is the best way to insure these as well and protect ourselves?
I’m sorry to hear about your father.
Using a LLC (or partnership) would be cleaner for splitting up the profit/losses every year and when it's time to sell. At the end of the year, a partnership tax filing is prepared and a k-1 is generated for each Member so that each individual person can prepare their tax return.
You should have a LLC registered in the State that the property is located in. You can have one LLC which is registered as a foreign entity in the othe states, or separate LLC's for each State. People do the latter when trying to obtain anonymity. You file first in the anonymity preferred state, then file for LLC in the other states with the first state being the owner/member.
Just remember that when title is held by a legal entity, you can’t get regular residential financing. It’s a commercial loan. So if you have to refi later , it will be a bit harder and more expensive.
Also, CA has. ~$800 annual filing fee for each LLC. I believe if you are a resident of CA, they charge the same fee if you own out of state LLC. So, that adds up pretty quick when you have multiple LLC's because of different states. Not sure how CA residents get a round this — I think they don't...
I hope this helps. Talk to a professional or two to get yourselves set up right.
Thanks @David M. for your response. As of right now, it seems as if having one LLC filing as a partnership is the best way to go. The question is... should we have the LLC in CA or AZ? My brother lives in AZ and I am in CA. We have one commercial prop in CA and One MF prop in AZ.
My last question is: How should we protect ourselves? Umbrella policies, rental dwelling policies?
Well, for specific advice I'm a bit out of my depth...
Since CA charges $800 for each LLC you have (even ifts its out of state), you might want to find another way. I'm not sure of what other ways people do. Or, you just have to consider hte $800 annual filing fee part of the cost of doing business. If you still want to go the route of a LLC, I don't know which State is better to make operate your LLC out of. Perhaps, AZ in case you leave CA and sell the corresponding property so you could potentially get rid of the CA filing fee.
Or.... As its been posted on BP many times, you could skip the LLC route. You'll see I'm of the opinion that for smaller investments, the cost of the asset protection potentially afforded by the legal entity isn't worth it. Your case is definitely a little more complicated. Two people in different states. While on BP we post mainly about the Federal tax, each State is different, not just in taxes but I assume in 'legal entity' law.
Just to try to discuss: I suppose you could just each own the property Tenants in Common. Then, for asset protection you just obtain homeowner's insurance and maybe each get an umbrella policy. What ever company you use now for your insurance (auto, home, etc.) should be able to issue them all. That's how many investors handle it.
That being said, what is the nature of the commercial property? How much equity is there? How much liability is there? --- These are rhetorical questions. Even if you told me I'm not sure if i could help you. With commercial properties, they tend to have a market value much greater than your typical residential home. Additionally, whatever business operations that may be taking place may also generate lots more liability. That is, commercial assets is usually more of a justification to incur the costs of maintaining a LLC.
As you investigate this further, you'll see that the LLC isn't just the cost of filing for one. There is maintaining the corporate veil which impacts how you operate/handle the funds. We a decently long discussion thread going here in BP last week about somebody who transferred Title of the property to a LLC but has the mortgage under their personal name. Needed to figure out how to handle that to maintain the corporate veil since its looks screwy the ownership of Title and the debt aren't under the same name. So, there are more legal fees incurred to make sure you are protected. Also, financing is generally more expensive since you need to get commercial loans.
Also, remember that LLC's are for asset protection. They really don't change your tax filing or let you deduct anything additional. Granted, forming a company of some sort provides a legitimacy to the business. However, for long term real estate investment you don't really need that most of the time.
One last point which I guess is something of a pet peeve of mine. We never hear about what actually "really" works to maintain the corporate veil. People say they do "lots" of things and they are fine. But, from my point of view, until you have a lawsuit, you don't necessarily know if you have pierced your corporate veil. There is one person on BP who posts that LLC's aren't worth a damn because their corporate veil's are always being pierced in court. But, I never know if that is because the owners did something out of ignorance or deliberately.
Sorry, I couldn't give you a direct answer. I'm not a professional on all this stuff. I try to keep my investing a little less complicated. I hope it gives you a good direction. Feel free to ask me additional questions and I'll try to help. Good luck.
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 likely be deemed to be "doing business" in California and therefore likely 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 likely 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 may 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 may 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. Also, the state of formation is likely where internal disputes would be brought among LLC members, so if you and a partner live in CA, you probably want to arbitrate in CA if the two of you had a disagreement. 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.
David & Katie: Wow...thank you so much for all that no fat information and discription. Reading Katie's link was very helpful. I will consider putting my property in Trust or at least not jump into putting a no-mortgage property str8 into an LLC that is just sitting there.
David and Katie have given some great advice, and as much as they can give without taking you on as a client. I think this article will also be equally helpful in regard to setting up an LLC partnership. You might also look at what is known as a venture-specific LLC. This article gives you a rundown of what that entails.
Best of luck!