Properties in CA and TX, what state to form LLC in?

Question

Hi all,

I have 3 Single Families in TX and 1 Single Family in CA. I live in CA. I am trying to figure out what state to form my LLC in.

Out of the properties I have, I have more equity in the CA property as it was bought at the right time!

For now, I am looking to form only one LLC. I don't want to create a complicated structure with Wyoming or Nevada LLCs and Land Trusts as many gurus pitch on internet for the simple reason that I don't think I am that big yet. Any suggestions on what state to form the LLC in?

Vaibhav Puranik · Answer

Thank you @Katie Lepore! for your detailed reply.

Katie L. · Answer

@Vaibhav Puranik

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 M. · Answer

@Vaibhav Puranik

Correct.  Here are some other posts about LLC's.  This topic comes up everyday from different angles.  In the end its up to you, of course.  But, realize there is a lot of "baggage" that comes along with a LLC.

https://www.biggerpockets.com/forums/61/topics/827155-starting-an-llc-after-two-propertieshttps://www.biggerpockets.com/forums/48/topics/848440-question-about-loan-and-llchttps://www.biggerpockets.com/forums/52/topics/848626-questions-about-putting-a-property-into-an-llc

https://www.biggerpockets.com/forums/61/topics/827155-starting-an-llc-after-two-properties

Vaibhav Puranik · Answer

@Michael Plaks Thanks. I might have to do that at the end. I am trying to figure out if there is a way out.

Vaibhav Puranik · Answer

@David M. Just to confirm, are you saying that I shouldn't use a LLC at all?

Michael Plaks · Answer

@Vaibhav Puranik

CA will charge you $800 every year no matter where you form your LLC, because it owns a property in CA and you live in CA.

TX will charge you $750 one time to register an LLC that is not formed in TX. $300 for a native TX LLC.

Most attorneys (I'm not one) do not recommend holding properties in multiple states within the same LLC. Some believe that you can do it with a Series LLC, which is sort of like one LLC with multiple compartments. So, if any LLC at all, you might want to consider a Texas Series LLC. It will still have to pay CA $800 each year.

David M. · Answer

@Vaibhav Puranik

If you go this route of using a LLC, do you realize that it has a bunch of financial pitfalls, direct and indirect?  Plus CA will charge you some $700-$800 annual for each LLC you have even if out of state.

You need to form or register the LLC holding Title in the State the property resides.  Otherwise, your LLC will have no legal standing in that state should you need to go to court.  That’s the short of it.