LLC California Franchise Tax

Tax, SDIRAs & Cost Segregation
5yFollow

LLC California Franchise Tax

Olga Zelenko
Member since 2020 路 8 posts 路 4 votes

I just discovered that if I live in California and I have an LLC (in or out of state) I will be required to pay Franchise Tax in California (annually 800$) for each LLC.

My first plan was to create for each property its own LLC.

This discover is changing my plans (and my numbers of course 馃檮 )

A few options that came to my mind to try to avoid this route:

1. Instead of creating an LLC, purchasing an Umbrella insurance for all the properties.

2. Create 1 LLC and sign a few properties under the same LLC (instead of paying 800$ for each LLC/property)

Are there other options that I didn't think of?

What are the pros/cons for the Umbrella insurance vs LLC?

Thanks for your wisdom in advance 馃檶

1Reply
49 views

Most Popular Reply

Timothy Murphy III
Real Estate Broker 路 Cleveland, OH 路 Member since 2012 路 771 posts 路 252 votes
5y
Originally posted by @Michael Plaks:

@Olga Zelenko

Also notice that people who give you legal advice about LLCs or even insurance being unnecessary have all graduated from the Social Media School of Law, apparently with honors. I'm not an attorney, so I won't be offering my legal advice, and neither should they, frankly.

Of course attorneys are interested in "selling" you the LLCs and other structures. Same as doctors are interested in "selling" you medications and procedures. I still take my medical advice from doctors and not from Facebook. I guess I'm old-school. 

This post as a whole is excellent advice, and a question I get a lot. At least in Ohio, the LLC is almost always worth using for property investors, EXCEPT when the investor resides in California, for the tax based reasons Michael discussed. The portion I quoted is hysterical in addition to being good advice. There's lot of people giving advice on how LLCs and tax issues function in the real world despite having no background or qualifications to actually give this advice. Beware legal advice from Facebook lawyers.
4Reply
See this reply in the discussion

17 Replies

Jump to latestLatest
  • Patrick J.
    Rental Property Investor 路 Tucson, AZ 路 Member since 2019 路 173 posts 路 87 votes
    5y

    @Olga Zelenko

    LLCs are overrated. Get insurance and like you said, throw a certain number of properties into 1 LLC maybe up to 2 million and don't have too much equity in the properties because lawyers are vultures. I would say even having insurance opens up more doors for frivolous claims by lawyers to get money because it's easier through insurance.

    1Reply
  • Olga Zelenko
    OP
    Member since 2020 路 8 posts 路 4 votes
    5y

    @Patrick J. Thanks!

    Interesting insight 馃憤

    0Reply
  • Tien James
    New to Real Estate 路 Gardena, CA 路 Member since 2017 路 17 posts 路 6 votes
    5y

    I don't know about this! I contacted a CPA in Ohio and he told me, that the LLC will be doing business in that state, so it's subject the state of Ohio taxes. All forms of communication and what the public sees via info for the rentals in my LLC is through my statutory agent. My Stat Agent then forwards all mail to my UPS address here in CA. My LLC is registered in Ohio as doing business in that state, but has a CA address. Lastly, this same CPA told me its a good idea to have ~4-5 properties in each LLC. Once you have more than 1 LLC, put an umbrella or extra layer of protection for your LLCs/rentals.

    1Reply
  • Olga Zelenko
    OP
    Member since 2020 路 8 posts 路 4 votes
    5y

    @Tien James

    Thanks Tien!

    I'm strongly recommend you to check out the franchise tax for your business.

    BTW, my market is OH as well.

    0Reply
  • Tien James
    New to Real Estate 路 Gardena, CA 路 Member since 2017 路 17 posts 路 6 votes
    5y

    Will do!

    0Reply
  • Christopher Smith
    Investor 路 brentwood, CA 路 Member since 2016 路 1k+ posts 路 730 votes
    5y

    I have Ohio rentals and I'm fine with having adequate landlord policies on each property. I'm evaluating adding umbrella insurance with an identified carrier in the future should my risk profile or life circumstances change. It's relatively inexpensive and should be far more than adequate to cover any outlier liability events.

    While you would never know it from listening to the LLC promotion crowd, risk mitigation begins first with buying solid properties, in good neighborhoods and having diligent and competent management. If you are carrying out adequate due diligence by performing these activities then Rube Goldberg LLC structuring is likely unnecessary.

    Now neither the attorneys that market these awkward, convoluted, expensive and administratively burdensome constructs, nor their victims who can't wait to jump into them at any price to prove to the world that they are a chest thumping real estate "player" would ever even begin to contemplate risk mitigation through the excercise of basic business due diligence activities. 

    My God what fun would that be, and far worse yet how could you make a decent buc from it?

    1Reply
  • Philip Klinck
    Specialist 路 Greenville, SC 路 Member since 2011 路 83 posts 路 41 votes
    5y

    Use a Trust instead of an LLC for each property. Have the LLC be the beneficiary of all the Trusts.

    1Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP庐, PFS 路 FL 路 Member since 2017 路 5k+ posts 路 3k+ votes
    5y
    Originally posted by @Olga Zelenko:

    I just discovered that if I live in California and I have an LLC (in or out of state) I will be required to pay Franchise Tax in California (annually 800$) for each LLC.

    My first plan was to create for each property its own LLC.

    This discover is changing my plans (and my numbers of course 馃檮 )

    A few options that came to my mind to try to avoid this route:

    1. Instead of creating an LLC, purchasing an Umbrella insurance for all the properties.

    2. Create 1 LLC and sign a few properties under the same LLC (instead of paying 800$ for each LLC/property)

    Are there other options that I didn't think of?

    What are the pros/cons for the Umbrella insurance vs LLC?

    Thanks for your wisdom in advance 馃檶

    Get a one holding LLC that owns LLC in the other states. That way you are paying at the one level for the LLCs in the other states.

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA庐5241 Reviews
    WebsiteView Page
    TaxMD庐 | AI-Powered Tax Planning
    WebsiteView Page
    0Reply
  • Olga Zelenko
    OP
    Member since 2020 路 8 posts 路 4 votes
    5y

    @Ashish Acharya Thank you Ashish for you advise!

    Do you mean to open patent LLC in California and out of California LLC's to be under the parent?

    0Reply
  • Olga Zelenko
    OP
    Member since 2020 路 8 posts 路 4 votes
    5y

    @Philip Klinck Thank you Philip!

    Just to make sure I understand, do you recommend that the LLC will be created in California and the trust where I do business, like Ohio?

    2Reply
  • Christopher Smith
    Investor 路 brentwood, CA 路 Member since 2016 路 1k+ posts 路 730 votes
    5y

    California will very likely impose the minimum fee on all of your LLCs, regardless of how you stack them and regardless of what state they are formed.

    3Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent 路 Houston, TX 路 Member since 2014 路 5k+ posts 路 6k+ votes
    5y

    @Olga Zelenko

    Your wonderful state will impose the $800 ransom on any LLC where you're a member. It does not matter whether the LLC is formed in OH or TX or the Moon. Does not matter where your properties are. CA will consider it "doing business in CA" and, consequently, subject to $800/yr simply because YOU have the misfortune of being a CA resident.

    Tian, show this to your CPA if he believes that your OH LLC can escape the CA extortion:
    https://www.ftb.ca.gov/forms/2019/2019-568-booklet.html
    "Partnerships and LLCs are considered doing business in California if they have a general partner or member doing business on their behalf in California."

    Personally, I believe that your Franchise Tax Board is misinterpreting their own CA statute, but they have been sued many times, and they usually won. If you have money to burn on litigating FTB, you can try to ignore the $800, but I would not.

    Also notice that people who give you legal advice about LLCs or even insurance being unnecessary have all graduated from the Social Media School of Law, apparently with honors. I'm not an attorney, so I won't be offering my legal advice, and neither should they, frankly.

    Of course attorneys are interested in "selling" you the LLCs and other structures. Same as doctors are interested in "selling" you medications and procedures. I still take my medical advice from doctors and not from Facebook. I guess I'm old-school. 

    4Reply
  • Tien James
    New to Real Estate 路 Gardena, CA 路 Member since 2017 路 17 posts 路 6 votes
    5y
    0Reply
  • Tien James
    New to Real Estate 路 Gardena, CA 路 Member since 2017 路 17 posts 路 6 votes
    5y
    Originally posted by @Michael Plaks:

    @Olga Zelenko

    Your wonderful state will impose the $800 ransom on any LLC where you're a member. It does not matter whether the LLC is formed in OH or TX or the Moon. Does not matter where your properties are. CA will consider it "doing business in CA" and, consequently, subject to $800/yr simply because YOU have the misfortune of being a CA resident.

    Tian, show this to your CPA if he believes that your OH LLC can escape the CA extortion:
    https://www.ftb.ca.gov/forms/2019/2019-568-booklet.html
    "Partnerships and LLCs are considered doing business in California if they have a general partner or member doing business on their behalf in California."

    Personally, I believe that your Franchise Tax Board is misinterpreting their own CA statute, but they have been sued many times, and they usually won. If you have money to burn on litigating FTB, you can try to ignore the $800, but I would not.

    Also notice that people who give you legal advice about LLCs or even insurance being unnecessary have all graduated from the Social Media School of Law, apparently with honors. I'm not an attorney, so I won't be offering my legal advice, and neither should they, frankly.

    Of course attorneys are interested in "selling" you the LLCs and other structures. Same as doctors are interested in "selling" you medications and procedures. I still take my medical advice from doctors and not from Facebook. I guess I'm old-school. 

    Thank you for this! I have been misinformed. I'll be showing my CPA this asap! Yes, I can't wait to leave this $*^t state, as soon as my kid has finished school.

    1Reply
  • Christopher Smith
    Investor 路 brentwood, CA 路 Member since 2016 路 1k+ posts 路 730 votes
    5y

    BTW - I don't have a FB account, but I do own the stock, bought in at 22 a few years ago. :)

    1Reply
  • Greg O'BrienBusiness Member
    Accountant 路 Boston, MA 路 Member since 2019 路 386 posts 路 336 votes
    5y

    @Tien James Michael is right. This has been litigated multiple times.

    3Reply
  • Timothy Murphy III
    Real Estate Broker 路 Cleveland, OH 路 Member since 2012 路 771 posts 路 252 votes
    5y
    Originally posted by @Michael Plaks:

    @Olga Zelenko

    Also notice that people who give you legal advice about LLCs or even insurance being unnecessary have all graduated from the Social Media School of Law, apparently with honors. I'm not an attorney, so I won't be offering my legal advice, and neither should they, frankly.

    Of course attorneys are interested in "selling" you the LLCs and other structures. Same as doctors are interested in "selling" you medications and procedures. I still take my medical advice from doctors and not from Facebook. I guess I'm old-school. 

    This post as a whole is excellent advice, and a question I get a lot. At least in Ohio, the LLC is almost always worth using for property investors, EXCEPT when the investor resides in California, for the tax based reasons Michael discussed. The portion I quoted is hysterical in addition to being good advice. There's lot of people giving advice on how LLCs and tax issues function in the real world despite having no background or qualifications to actually give this advice. Beware legal advice from Facebook lawyers.
    4Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free