Where should we file LLC?

15 Replies

Hello!,

As a military family, we have purchased properties at almost every assignment, then converted them to rentals we were reassigned. Now we want to form an LLC (or multiple LLCs) and are not certain where we should file. Do we file separately in each state where the properties are located? Or file one LLC in Texas (our home of record with the military, even though we do not currently live there). Thoughts?

Farah Legal in FTW can get you set up with a series llc.  We have a similar history and so I understand your delima 

@Tonya Christensen

You need to form the LLC in the state the property resides. Otherwise, the entity will have no legal standing in that state should you have to go to court.

Also, have you looked into what it takes to maintain and protect your corporate veil? The LLC only provides asset protection really, not any tax benefits if you think that's the cases. So, just be mindful how you get everything with regards to the property into the entity (Title, insurance, etc).

Good luck.

I'm curious why you want an LLC for these properties. Umbrella insurance is a great way to protect your personal assets and it's much cheaper than multiple LLCs. Just something to consider. Keep us updated with what you decide to do!

@Douglas Spence...we had not considered umbrella insurance. Our CPA made the recommendation that we consider LLCs, but said he did not know which state/states it made most sense to file them in.  Def worth considering...

@Tonya Christensen

Ahh...  accountants and lawyers sometimes recommend things because  it’s nice to have.  Unless you have a cpa/jd it’s tough to get the full picture

Just keep your properties in good repair, have landlord/homeowner insurance, and an umbrella insurance policy and you should be fine...

Like I mentioned, it's up to you if you really want LLC's, but your cpa/accountant doesn't normally look at all the aspects of maintaining and protecting your corporate veil since other than co-mingling of funds it's really a legal matter.

Good luck

@Tonya Christensen

Similar boat... active duty for 19 years now.

This is really a question on your risk tolerance. We purchased properties as our primary residence, PCSed, and turned them in to rentals... we kept the properties in our own name. There is legal exposure doing that and if sued, a tenant can potentially get at your personal assets. When we started, we had no significant personal assets to protect.  We made sure we were well-insured and had professional property management to mitigate risk. So, one question to ask yourself is how much assets do  you have to protect and is it worth the annual fees for the various LLCs.


If you move the properties into an LLC, your lender may not approve and could call the note due. Not likely, but it could happen.

I’m now investing in apartments and my attorney and tax professional both recommend an LLC in the state where the property is located. I’ve heard the same advice from a few attorneys... Now, there are some additional legal protections or anonymity in certain states (DE or WY), but we don’t need the extra protections (and we’d have to register the out-of-state LLC in the state they’re located anyway which is a similar process to establishing an LLC anyway).

Originally posted by @Tonya Christensen :

@Douglas Spence...we had not considered umbrella insurance. Our CPA made the recommendation that we consider LLCs, but said he did not know which state/states it made most sense to file them in.  Def worth considering...

 Why did the CPA make the recommendation?  I’d be leery dealing with a CPA that can’t discuss which states to form the entities... our CPA has given us very detailed information on pros/cons of forming entities in different states from a tax perspective. In our case, the answer was to form in the state where the property is located. But, our situation is different than yours...

@Tonya Christensen I just formed an LLC to BRRRR properties, and the only reason I did that was to allow me to have access to commercial lending, and so I can purchase more than 10 homes under my name. I own 3 SFH under my name and will be adding 2 more by the end of the year (via turnkey providers), so I didn't want that limit to affect my ability to BRRRR. Happy to chat more about this if you're curious. Best of luck!

 Why did the CPA make the recommendation?  I’d be leery dealing with a CPA that can’t discuss which states to form the entities... our CPA has given us very detailed information on pros/cons of forming entities in different states from a tax perspective. In our case, the answer was to form in the state where the property is located. But, our situation is different than yours...


CPA said we should consider it for liability, and recommended we talk to an attorney to find out the best option for our specific scenario.  I gather, from comments that he has made, that we are small potatoes compared to most of his clients. It may not have been worth his time to go into it when he can send us to an attorney to get the info.

 

@Tonya Christensen

Oh I see. Your CPA is just being professional. Remember, the LLC is really there to provide asset protection for you. It doesn't change what deductions you can take, etc, so your taxes are pretty much the same (except the additional costs of the LLC, of course). So, its really a legal matter which is why the CPA is referring you to an attorney. Unless you can find a combined CPA/JD, its always this back and forth. The client has to be able to piece the information from an accounting standpoint and a legal standpoint.

Just to kinda go over it.. The issue isn't really the the value or equity of the properties (I am assuming you have loans, but even if they are paid off). That should be covered by your landlord insurance policy. The real issue is liability. Your landlord policy should already have coverage for that. Lets say you get a $5M umbrella liability insurance policy (the largest it gets) for say $1k annual premium. This umbrella policy will cover all your properties AND actually yourself and your family. While the US is a pretty litigious country, what can happen on your property that you could be liable for in excess of $5M (and whatever your base coverage is)? It really shouldn't be much of anything if you keep your properties maintained and use contractors with their own insurance.

Now, I'm assuming you have single family properties. Its not like you are investing in commercial properties that has a Walmart or a gas station or something on it at which point I'd personally recommend the LLC.

Just one other thing to note. The umbrella policy kicks in over an above any existing policies you hold. So, since everything is in your personal name its actually covering all the rest of your personal liability at the same time. So, if you don't have it already, you are basically getting a huge extra piece of mind (hopefully you never have to use it). Meanwhile, if your properties are split up over multiple LLC's, you'd have to get policies for each LLC to get the same effect (of course, do you really need the umbrella if you have the asset protection of the LLC).

I hope this helps.  Good luck.

Originally posted by @David M. :

@Tonya Christensen

Oh I see. Your CPA is just being professional. Remember, the LLC is really there to provide asset protection for you. It doesn't change what deductions you can take, etc, so your taxes are pretty much the same (except the additional costs of the LLC, of course). So, its really a legal matter which is why the CPA is referring you to an attorney. Unless you can find a combined CPA/JD, its always this back and forth. The client has to be able to piece the information from an accounting standpoint and a legal standpoint.

Just to kinda go over it..  The issue isn't really the the value or equity of the properties (I am assuming you have loans, but even if they are paid off).  That should be covered by your landlord insurance policy.  The real issue is liability.  Your landlord policy should already have coverage for that.  Lets say you get a $5M umbrella liability insurance policy (the largest it gets) for say $1k annual premium.  This umbrella policy will cover all your properties AND actually yourself and your family.  While the US is a pretty litigious country, what can happen on your property that you could be liable for in excess of $5M (and whatever your base coverage is)?  It really shouldn't be much of anything if you keep your properties maintained and use contractors with their own insurance.

Now, I'm assuming you have single family properties. Its not like you are investing in commercial properties that has a Walmart or a gas station or something on it at which point I'd personally recommend the LLC.

Just one other thing to note. The umbrella policy kicks in over an above any existing policies you hold. So, since everything is in your personal name its actually covering all the rest of your personal liability at the same time. So, if you don't have it already, you are basically getting a huge extra piece of mind (hopefully you never have to use it). Meanwhile, if your properties are split up over multiple LLC's, you'd have to get policies for each LLC to get the same effect (of course, do you really need the umbrella if you have the asset protection of the LLC).

I hope this helps.  Good luck.

Great information!  Thanks for the detailed explanation! 

@Tonya Christensen The umbrella policy I have covers my 3 SFH, plus personal liability (if I rear-end someone and they sue me). The insurance company (USAA) required that I have 300k of liability coverage for each investment property, and a minimum coverage for liability for my vehicle and my wife's vehicle in order to give the umbrella policy. If I get sued, the liability coverage for the asset (whether it be investment property or vehicle) will cover up to the limit for that policy, and if that gets maxed out, only then will the umbrella policy kick in.

I purchased $2 million worth of coverage for an ANNUAL premium of $381, and there is no deductible. I recently wrote an article about this on my website! The link is in my signature. 

Originally posted by @Tonya Christensen :

@Douglas Spence...we had not considered umbrella insurance. Our CPA made the recommendation that we consider LLCs, but said he did not know which state/states it made most sense to file them in.  Def worth considering...

 Your CPA should not be offering legal advice.  LLCs are never a tax strategy maneuver and are strictly for liability protection. 


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