Investor · Member since 2024 · 33 posts · 21 votes
Hi all,
I'm an OOS investor looking in Birmingham. I'm currently debating between a few different legal structures and would love some advice from attorneys, CPAs, or other investors. Ideally I would like to have a Wyoming LLC with individual Alabama LLCs under it containing properties up to 500k in value in each, and then umbrella insurance on top of that.
The problem I'm running into is I reside in California which charges a minimum $800 a year franchise tax for every LLC you own even though they aren't in CA making this route more expensive than I would like.
Some options I'm debating between are:
Ditching the Wyoming LLC and doing 1 LLC in Alabama + umbrella insurance and opening a second when my portfolio hits 500k in the first one.
Owning under my name with just an umbrella policy (cheapest option but less protection and doesn't allow me to finance with DSCR)
Opening a series LLC which Alabama allows for + umbrella insurance (to my knowledge CA treats each series separate when it comes to the franchise tax so each would be subject to the $800 fees)
I'm open to any advice on these legal structures, or a new approach all together. Happy to learn from everyone here. Thanks in advance!
I've always been interested in learning more about LLC structures for real estate investing. Looking forward to reading everyone's advice and insights on this topic!
I've always been interested in learning more about LLC structures for real estate investing. Looking forward to reading everyone's advice and insights on this topic!
Matthew, this is exactly the type of structure I'd have the CPA and attorney model before setting anything up.
The biggest thing I'd clarify is that the California $800 issue isn't necessarily solved simply by forming the LLC in Wyoming or Alabama. California's rules can apply to out-of-state LLCs that are doing business in California, and where you're actually managing the entities from can matter.
I'd also be careful with the Series LLC option. California has specific filing and tax rules for foreign Series LLCs, so I wouldn't assume it automatically eliminates the $800 annual tax for each series.
I'd compare the three structures based on annual state costs, foreign registration requirements, liability protection, financing, bookkeeping, tax treatment, and how many properties you realistically expect to own.
Sometimes the cheapest structure on paper becomes the most expensive once you add California compliance and administration.
This is definitely something I'd model before you acquire the next property rather than after the entities are already established.
Feel free to DM me, I’d be happy to send over a few resources that might be helpful.
I suggest you consult with a California business lawyer on the franchise tax issue.
As you have suggested, I typically advise clients to form a holding company to hold the membership interest in multiple subsidiary LLCs, which subsidiaries own one or more real estate assets. This allows you to segregate ownership and therefore liability between your properties. If, for instance, a tenant of one property sues and obtains a judgment against the LLC owning that property, they cannot force the sale of your properties owned by different LLCs to satisfy that judgement. How many properties to own in one LLC is a matter of preference and practicability. Ideally, you want a separate LLC for each property, but for lower value properties the cost and administrative effort may not justify a one-to-one ratio. You would have to evaluate the expected cash flow of $500k worth of properties against the expense of maintaining each LLC to determine wether that is the right balance for you.
The purpose of the holding company is primarily to file a consolidated federal tax return, with each subsidiary as a disregarded entity of the holding company. I understand California's Franchise Tax Board takes the position that if a foreign LLC owns property in another state, but the person having the authority to direct the management of the foreign LLC resides in California, then the LLC is considered to be doing business in that state. I also generally understand California takes the position that a disregarded foreign LLC must pay the minimum franchise tax, even if the non-disregarded tax payor pays the tax, if the foreign LLC is managed from California. Consider that the subsidiaries are not owned by you: they are owned 100% by the holding company, which would be domiciled in Wyoming (a foreign LLC to California), and you could also name the Wyoming LLC as the Manager of the subsidiaries, with you managing the Wyoming LLC.
What I suggest you ask a California attorney is: if a foreign LLC, which is managed by a California resident, is managing the business of foreign subsidiaries (in your case Alabama LLCs), are the subsidiaries considered to be managed from California such that the minimum franchise tax is due for each subsidiary? Arguably, the subsidiaries are managed from Wyoming.
If you talk to a CA attorney, I’ll be curious myself to know the answer.
Best,
Corey Parker
DISCLAIMER: I am a Florida licensed attorney. I am not licensed in California and cannot give legal advice on California law. Accordingly, this correspondence does not constitute legal advice, and you should consult with a California licensed attorney to confirm this information.
