I'm purchasing a small multifamily property in San Diego and am looking to set up an LLC for liability protection. Do you recommend holding the property in a CA LLC or an out of state LLC entity for this purpose? I have a Texas LLC already set up for my Austin rentals and understand that having a separate entity for each property is best. I also have a W2 job in CA if that makes a difference for tax purposes. Any suggestions would be appreciated.
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. Each LLC in California costs you $800, so if you already have a different LLC you may want to consider combining depending on your risk tolerance, the property values, your other assets, your estate planning, your cash flow, etc.
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 (though Texas has no income tax). 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 in-state property or even 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 "foreign" 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.
Generally you will want to form an LLC in the state where you do business, but not always. Is your TX LLC a "traditional" LLC, or a series? If it's a series, then you'll be comparing the cost of registering a new series cell as a foreign entity in CA, vs. forming a new CA LLC (now and on an ongoing basis). You should also understand CA's treatment of series LLCs, to know if there is any additional risk associated with that type of entity.
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. Each LLC in California costs you $800, so if you already have a different LLC you may want to consider combining depending on your risk tolerance, the property values, your other assets, your estate planning, your cash flow, etc.
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 (though Texas has no income tax). 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 in-state property or even 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 "foreign" 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.
@Dan Lewis Hi Dan, if you’re located in CA, you have to form your entity in CA. If you form it in another state you’ll just end up paying two states’ taxes on the income and eventual capital gains. There’s no advantage to that. Feel free to reach out to me to discuss formation, if you have other questions.
Hey @Dan Lewis,
Like @Katie L. said: California is kinda special. Even if you form an out-of-state LLC, California may require you to register as a foreign LLC which may cost you $800 annually. I'm in the process of forming an LLC at this moment for the same reason. I know... it's a PITA.
Disclaimer: I am not a lawyer nor am I offering legal advice. This is just my opinion.