Home state registration needed for my Wyoming LLC?

Question

Hi everyone, I just formed a LLC in Wyoming and intend to buy properties in Alabama.

I live on the east coast however. Do I need to register my LLC in my home state as well or is a foreign registration in Alabama sufficient?

Thanks.

Jason Zundel · Answer

Victor, unfortunately you get the attorney answer right off the bat - it depends.  If you are going to pay yourself a w-2 salary out of the WY LLC, then yes you would need to register it in your home state as well.  Employment is sufficient contact and use of resources within a state to require foreign filing.  If, however, you are not paying a salary, but rather taking distributions then you likely would not need to register in your home state.  Taken a step further, if you have elected to have the LLC taxed as an s-corp you would then be required to take a reasonable salary as the member, and thus be required to foreign file and register in your home state.  If the LLC is disregarded (better option from a long-term capital gains perspective) or taxed as a c-corp (not recommended if you hold property in the LLC long-term in the LLC), then you have the option and can simply take member distributions rather than a salary or payment for services.Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

Aristotle Kumpis · Answer

Every real estate attorney I know will tell you that you should have an LLC in the state were you own your rental. So if it's Alabama, you will need to form one there in order to get the best legal protection.

Jason Zundel · Answer

Aristotle - Fortunately, the registration in AL takes care of this piece.  Many choose to create the LLC in another state (where they live, better choice of law, etc.) and then foreign file or register said LLC where the property or business activity will take place.  So long as the LLC is properly filed in AL you will get the same level of protection!Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

Stuart Udis · Answer

The sound & practical advice @Aristotle Kumpis references boils down to venue and choice of law. Let’s use @Victor N. as a case study. He lives on the east coast, is purchasing a property in AL and decides to form a Wyoming LLC (either to be title owner or really gets swept up in the asset protection lunacy and the Wyoming LLC is formed to be a member LLC for one of the many misguided reasons investors are advised to spend money unnecessarily).

In almost every scenario imaginable where a conflict will arise involving Victor’s AL property the appropriate venue and choice of law will be AL. Wyoming law will not apply and Wyoming will not be the appropriate venue.  Landlord/Tenant dispute? Will be decided by an AL court with AL laws applied. Premises liability claim? Same thing. Contractor dispute? Same thing. Mechanic lien? Again, AL court and AL Laws. I just ran through 99.9% of the likely disputes Victor will encounter as the owner of AL real estate and Wyoming laws will not apply and the dispute will not be resolved in a Wyoming court.  In addition, if there’s a mortgage any supposed additional anonymity that many who incorporate in states like WY are chasing is meaningless because their identity  can easily be obtained by reviewing the publicly recorded mortgage information that will bear the owners name on the signature line (or a host of other methods easily available to ordinary folks that requires zero level of sophistication).

I believe 99% of investors who spend extra on filings and registrations for LLC’s in states other than the state where the property is located or in some instances where they live would not spend the money if they understood the mechanics of litigation and how the law is applied. It truly amazes me time and time again how much money and effort is spent on asset protection with zero understanding of how these systems that are pitched will actually help.

Jason Zundel · Answer

I will agree that there are a lot of misconceptions when it comes to the use of out-of-state LLCs when it comes to asset protection, and further agree 100% with your description of litigation Stuart.  That said, a properly used WY or DE LLC can be extremely useful, especially for real estate investors that own multiple properties and want to do so anonymously.  The key is in how those are set up - you don't want the WY or DE LLC to actually own any of the properties, but rather to be holding companies for the individual state LLCs that actually hold and manage the properties. As Stuart said, the individual property LLCs will be subject to their state law and will run through their state court.  The benefit comes after the judgment - your creditor won't be able to go after you individually for that judgment because you aren't the owner of said state LLC.  They have to go through the WY LLC first as owner, and THAT'S when the charging order protection and WY laws will apply.  Again, this won't protect the property subject to the suit, but it will stop the suit/judgment from attaching to your personal assets or your other real estate holdings.  Proper maintenance of the corporate veil is very important here, but in doing so you insulate each individual property from liability.  Anonymity of ownership is another powerful tool to avoid lawsuits in the first place by taking the target of your back individually.Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

Victor N. · Answer

Thanks Jason.

Stuart Udis · Answer

I still struggle with the practacility of these strategies as it pertains to real estate operators. Particularly those buying the properties most commonly acquired by BP members. First, with respect to anonymity very few people purchase real estate where they are not originating a loan where they are the personal guarantor. This is a recorded document that's avaialble for anyone to review bearing the name and signatur of the borrower.

As far as judgments against the LLC member,  the examples you provide only come into play if the plaintiff/creditor is able to pierce the entity which is very rare and rarely even a desired outcome. Given  99.9% of claims involve landlord/tenant disputes, a premises liability claim or a payment dispute lets walk through each:

Landlord/Tenant dispute: Small claims/landlord tenant court will be where these cases are heard if not settled. These judges are not piercing entities but even if they did, these are  usually nuisance amounts, hardly worth the effort and costs of complex entity structures.

Premises Liability Claims: Plaintiff will retain counsel and will be given option of proceding on contingent basis or billed hourly if case has merit. Very few plaintiffs will want (or can afford) to front these costs and plaintiff's attorneys are going to strategize to maximize insurance proceeds because they aren't in the business of working on a contingent basis where no insurance money is available. In fact, even if the fact pattern suggests the type of gross negligence may exist where piercing the entity might be plausible, most plaintiff's attorneys will ignore those facts and/or frame the legal argument to impove the odds insurance carrier picks up coverage thus ensuring insurance proceeds are captured.

Payment disputes: Most contractors or service providers who are on the right side of a payment dispute will place a lien on the real estate. This is far more secure and the property owner cannot refinance or sell without clearing this debt. Why would the service provider opt to go after the LLC member?

In summary, the fact pattern is unlikely to surface where the member of the LLC is protected by a WY LLC and there is no anonymity when there's a mortgage (which is almost always the case). I am an advocate for owning investment real estate in LLC's but not in such a complexed fashion. Investors are going to generate a far greater ROI investing their savings back into real estate than on unecessary asset protection strategies or spend the money on proactively operating their real estate well so they can avoid conflict.

Home state registration needed for my Wyoming LLC?

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