All Forum Posts by: Christine Brown

@Christine Brown

if you are the only investor and you don't have too many investors, you should put it all in one single member LLC. The insurance policy is more important, if you can get an umbrella for at least $2 mm that would good, $5mm coverage is great.

Yes, you can use a holding company in WY to take advantage of the more protective laws of WY, in particular to protect the investment/rental properties from your personal liabilities @Katie Balatbat does bring up a number of important points, especially in regard to CA specific issues.

The CA Franchise Tax Board (FTB) has taken the incredibly extreme position that any LLCs owned by a CA resident, regardless of where the LLC are filed and where they are conducting business, are "doing business" in CA for the purpose of levying the CA franchise tax (min of $800/year). This means that you could own a business in AZ under an LLC in AZ that has no offices in CA, no employees in CA, no customers in CA, and no other connections to CA other than the fact that LLC is owned by you, a CA resident, and the FTB will still consider that as doing business in CA and will slap you with an $800 franchise tax. Thank you California.

This does mean that unless you get creative using things like Wyoming Statutory Trusts (WSTs) to exempt you from the CA franchise tax (and this can get complicated) the Wy holding LLC, in addition to and CA LLCs, would get slapped with the $800/year franchise tax. Thus, you really should sit down with an attorney and a CPA to assess your risk and options for limiting your exposure without killing yourself on fees and taxes.

I do want to close with a couple of brief notes: First, if you are being found personally liable for liabilities inside your LLC, then you're doing something wrong. As long as you are treating the LLC as a business entity separate from yourself by maintaining corporate formalities, not comingling assets, etc. you should not being seeing LLC liabilities hitting you personally. Second, insurance is a great tool and I would never advocate against having good insurance wherever possible. However, it's important to understand that insurance companies are not your friend and they will deny your claims in a heartbeat if they can so I would be reluctant to rely on insurance as your exclusive protection, especially in a state like CA where insurance premiums are skyrocketing and where the legal landscape is incredibly unfriendly to landlords.

@Christine Brown

There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc. Same goes for number of LLCs and what to fund them with, since bear in mind that CA tends to be more cumbersome and expensive to have LLCs than other states.

California is generally more involved than other states when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you may be deemed to be "doing business" in California and therefore maybe 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 may 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 may need to pay registration and filing fees in at least 2 states if you don't buy CA property as a CA resident.

Any lawsuits should be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced, some debate as to SMLLC). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. Or, a charging order may be granted. If you have a loan, you may wish to look into due-on-transfer clauses.

If you're going the umbrella insurance route, perhaps see if it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.

Creating an LLC in California could cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation. California does not recognize series LLCs. You'll also want to coordinate with your estate plan, and consider getting an estate plan if you do not yet have one in place.

These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.

*This post does not create an attorney-client or CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Hi Christine, these are great questions and the answers depend on your personal goals and your appetite for asset protection. For optimal asset protection, having an individual LLC for each property will provide the most comprehensive separation and protection for the properties, in particular in limiting each properties exposure to the liabilities of other properties. This is often ideal, especially for investors with only a few properties because the less properties you have, the bigger hit it will be to lose multiple properties to a single suit/liability incident. I see some investors who have dozens of properties opt for more than one property per LLC because 1 LLC/property becomes cumbersome and these investors can absorb the loss of 2-3 properties more easily than investors with fewer properties.

As for parent companies, an LLC setup in WY, NV, or DE, disregarded (or partnership) is often ideal because these states provide robust protections to prevent personal liabilities from exposing the LLCs/assets under the holding LLC and can also help provide a barrier of anonymity/privacy.

Lastly, if an LLC is sued and the assets of the LLC are exhausted by the judgement, then generally the buck stops there, they cannot go after the assets of the owners of the LLC.

Hi Christine, I would recommend discussing with an experienced real estate attorney to find a solution that fits your specific goals.

Depending on where you are located, different answers may make sense. For me when I was living in CA, I avoided creating many LLC's because there was an $800 fee/year. I just got a fairly sizeable liability insurance policy and an umbrella policy to cover myself. I was also able to get better rates and terms buying the properties in my personal name than under an LLC.

Now that I am in Ohio, it is much more affordable to have LLC's so I have been buying individual properties under their own LLC. I have not created a parent LLC yet.

Keep it simple - get insurance for potential tenant lawsuit. if you are sued for something insurance does not cover, then you will most likely have been found personally liable so a LLC would not protect you anyways. I would never in 1000 years have a LLC for every property as the amount I would pay in registrations and to accountants every year and bank accounts would drive me nuts.