LLC and Holding LLC vs DST ?

Question

Hi everyone,

I read a few posts on LLCs and holding LLCs and wanted to dive a little deeper.

I live in CA but own a single family house in Ohio. I contacted Corporate Direct and Wyoming LLC Attorney (that's the website name) and both recommend I form an LLC in Ohio then a holding company in Wyoming given their favorable laws. The Ohio LLC would help protect against attack number 1 (tenant suing) while the Wyoming LLC will help protect against attack number 2 (personal liability). An added bonus it sounds like California I would only need to pay franchise taxes for the holding LLC even if I have numerous additional LLCs. Does that sound accurate ?

Also, initially I thought about Delaware Statutory Trust for asset protection but it seems that a LLC for the property and then a holding LLC will accomplish the same?

Also has anyone used Wyoming LLC Attorney to form the holding company? They are much cheaper than Corporate Direct and seem to provide the same documents.

Thank you!

Christopher Smith · Answer

All that overhead for a rental in Ohio?

I've had many rentals in CA and Ohio for over 20 years, solid liability insurance for the properties and umbrella insurance for outside risk (if/as necessary) has been way more than adequate and worlds less administratively burdensome (plus you don't pay the annual $800 fee for each LLC you own that carries on business in or out of CA as almost all do under the incredibly wide scope of CAs franchise law).

Sounds like they are selling you a real Rube Goldberg special, one that's likely unnecessary for basic small landlord activities. Such a structure is one heck of an administrative burden for what are risks that can be much more easily and economically addressed by insurance.

Have they been regaling you with lots of over the top liability horror stories? As noted I've done this for over 20 years and know many others who have also been doing this for decades. Have yet to meet one conscientious landlord that's ever been sued for anything other than a relatively rare security deposit challenge where the dollars amounts are at most a nuisance issue.

Basit Siddiqi · Answer

@Johnny WeekendCalifornia will require an $800 fee for each LLC that you have while you live in California, especially if you are a managing member.California sees that you are making decisions for your WY LLC and OH LLC out of California. Thus they want their $800 for each LLC.You even have a California resident who responded to your thread explaining the same situation.

Janet S. · Answer

I did something similar (although I didn't create a holding company) where I created an LLC in Utah and then hold properties in that LLC in TX, all to have a better veil from would-be tenants trying to find me to sue me.  The lawyers in Utah assured me it was the best strategy and said it didn't matter that I lived in CA because the LLC was in Utah and the properties were out of state.  THEY WERE WRONG!  They don't practice law in CA, and I have mountains of paperwork and filings every year with TX, UT and CA, plus an $800/year fee that's nothing like the $15/year fee other states charge for an LLC.  Plus CA shares all your data so all the shielding of me personally doesn't exist if you live in CA.  The state wants their LLC fee from every LLC you have (that would be $800 x 2 in your example) if you live here, which is not well understood by lawyers from other states.  I wholeheartedly agree with Christopher - bad idea.  Talk to a CA lawyer - get a free consult.  If you still want an LLC, just open one in CA and make your life easier!

Eamonn McElroy · Answer

What we seem to disagree on is what the "right track" is.  You've been sold that a holding LLC, with a lower-tier LLC for each single family rental is absolutely necessary for asset protection.

If you're really serious about asset protection, engage an asset protection attorney.  Plan to spend a few thousand, it will be well worth it.  Don't base decisions on the suggestions of a company that *specializes* in selling WY LLC holding structures.

But if you do go down that route, I'm sure the companies in the OP will be happy to take your money.

And, CA will be happy to take $1,600 each year at the outset, and $800 more for each LLC you add.

Just don't forget to file your CA 568s and pay those taxes.  The statute of limitations never closes on a tax year that was never filed...

Is that asset protection attorney starting to look pretty cheap now?

Best of luck.

Eamonn McElroy · Answer

I am a tax CPA with clients that are residents of CA and/or have business activity in CA...I'm speaking from both experience and evidence.

California FTB Pub 3556:

California defines doing business as "actively engaging in any transaction for the purpose of financial or pecuniary gain or profit" (R&TC Section 23101(a)). An LLC is "doing business" if any of the LLC’s members, managers, or other agents performs activities in California on behalf of the LLC, regardless of where the LLC otherwise conducts business.

I presume you will be a managing-member of the holding company, and a manager of the lower tier entity.  Therefore, as you are resident of California, both of the LLCs will almost certainly be doing business in CA and have nexus regarding the CA annual LLC tax.

Eamonn McElroy · Answer

Listen to Chris.  A multi-tiered entity structure for one single family in Ohio is beyond overkill.

Even one LLC may not be necessary.

Rob C. · Answer

@Johnny Weekend - take a look at this thread for insights on why the responses you’re getting here regarding the franchise tax rules may not be entirely accurate: https://www.biggerpockets.com/...

@Janet S. - I’m interested to hear more about your situtation. Did the FTB discover your LLC structure themselves and come after you? Or did you voluntarily file Form 568 and pay (e.g. per an accountant’s advice)? It’d be interesting to hear what the FTB would say to you if you were to put a trust on top of those LLCs as discussed at the aforementioned link.

Johnny Weekend · Answer

Understood. Thanks.

Johnny Weekend · Answer

Are you sure about the bold part I highlighted? The whole point of the holding LLC is the avoiding paying the extra $800 per every new LLC. I see that you are not based in CA, so are you talking from experience or evidence (which is what I am looking forward) or from a hypothetical ?

Johnny Weekend · Answer

I am planning on acquiring more properties in the future so I want to get on the right track now.

LLC and Holding LLC vs DST ?

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