My partners and I live in California but are looking to purchase / have purchased properties out of state. Should we form an LLC in that respective state or will a CA LLC be enough? We're specifically looking at the Memphis market but wanted to know where it would make the most sense to incorporate. From my understanding, California will charge us that $800 annual fee regardless, but are there specific rules, asset protection and taxation matters that differ by state that I should be consider when deciding on where to incorporate? Thank you in advance.
The complication is that California requires an 800 fee for every LLC you possess, even in series. This gets expensive as you need an LLC in each state you buy properties in, and if you are really trying to protect assets, you need one for each property. The other option for California is to have Delaware state trusts for the properties. I used Royal Legal to set up mine. A little pricey to set up but has the benefit of bidirectional anonymity and asset protection. You only need one LLC to collect rents (out of Wyoming for charging order protections). Everything else is held in series DST.
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 be deemed to be "doing business" in California and therefore 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 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 will 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 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.