Which State to form LLC's ... Asset Protection for SFR

Question

I own rental properties in two states. How does one go about choosing which state to set up an asset protection plan using LLC's?

I own four residential rental properties.  Two in Southern California, where I currently live, and the others in Kansas City Missouri.    I've not formed LLC's for the properties but am now considering it.  I've been advise this is necessary as an additional layer of liability protection, and an important consideration in structuring an asset protection plan.  I currently have a two million dollar umbrella policy on top of rental property insurance with limits set at $500,000.  Half my personal assets are in SFR's with the other half in cash.  All the properties have substantial equity......greater than 60%.

Looking for thoughts on which state is best to form LLC's.  California is expensive with an annually cost of $800 per LLC.  I believe the cost is about $150 in Missouri.

I currently live in California. Is this a factor in choosing where to form LLC's?

Are individual LLC's required for each property?

Scott Smith · Answer

@Robert Carraway No, if all the income is distributed each year it is taxed at the personal level, not the Trust level.

Scott Smith · Answer

@Robert Carraway @Dan Krupa I'm an attorney, check out podcast #109 where I talk about DST's since I'll also be referencing them here.

The CA rule for franchise tax (if broadly interpreted) is that a CA resident is liable for CA franchise tax for any LLC operated anywhere. I think it's a low risk of them ever enforcing it if its an out of state LLC only doing business out of state, but still a risk.

The only way to completely avoid the risk for AP purposes for a CA resident is to use a Delaware Statutory Trust (DST). The DST is a Trust, not an LLC, so if operated correctly it is also taxed as a trust and not subject to franchise taxes. Business Trusts like the DST are not new. The only downside to the DST is the cost to set it up, but for a CA resident even the seemingly expensive is cheap to the comparison. If you live in CA in want to compartmentalize your assets and obtain anonymity, the DST is the only way to go.

Al Pat · Answer

Generally speaking, forming an LLC where property is better option when you have to sue the tenants etc. It works both ways. I would highly recommend seeking legal council for this. I have my LLC in a state where my properties are located.

Marc Loftin · Answer

Thanks Robert, I too am a curious ..... can a DST separate one from assets and provide some level of protection for personal liability.

Robert Carraway · Answer

@Marc Loftin Unfortunately, there's no legal structure that will protect your assets from your own negligence.  Get lots of insurance including an umbrella policy. (Should not be considered legal advice.)

Robert Carraway · Answer

@Scott Smith Thanks for weighing in.  Great to have an actual attorney weigh in.  I'm curious about the DST. Wouldn't you just be trading one problem for another. What I mean is wouldn't the DST subject the owner to the excessively high federal tax on trusts?

Marc Loftin · Answer

Thanks to everyone for the input.   After researching options it appears things can get seriously complex with asset protection strategies.....  Manager managed WY LLC, owning member managed LLC's, which own Land trust for each property...... my head is spinning.  All seems like an expensive rabbit hole and a full time job.  At this point I'm inclined to keep it simple.  The real issue I have ..... how do I protect my assets FROM MYSELF ?  Example:  If I inadvertently break an FFA regulation and cause harm to person or property while flying a glider or plane, it would appear all my assets are at risk, everything.  CA LLC's offer no outside protection, no charging order protection. IRA's  in CA provide limited protection.   Aviation insurance is super expensive or unobtainable.  Judgments can even be place against my ordinary monthly income.  Maybe it's time to move to Nevada and bury my head in the sand while keeping my fingers crossed.

Dan Krupa · Answer

Yeah, MO for the LLC to cover your properties here and umbrella for CA. (not an attorney)

Robert Carraway · Answer

I agree with Caleb.  I'm not a lawyer, but I have heard from several investors that even if you set up an LLC outside CA you will still need to register with the CA franchise tax board and pay $800.  If not, you probably will not receive the LLC asset protection in CA.  Given that the CA fee is per LLC, you'll probably want to lump all your CA properties into one LLC until you have several.  At that point, you may consider forming another LLC to protect one set of properties from another.

Which State to form LLC's ... Asset Protection for SFR

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