All Forum Posts by: Katie L.

@Jose Pena

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.

Any lawsuits would 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). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. If you're going the umbrella insurance route, make sure 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 would 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. Even if you create an LLC in the state where the property is located, California will collect $800 as a "foreign" LLC because you are managing the LLC from CA and therefore "doing business" in CA.

You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. 

Also, when you say trust, do you mean a living trust/family trust, or do you mean a more specialized trust?  Having an estate plan is very important, and in CA having a trust is almost essential to avoid probate but your typical family trust does not provide liability protection.

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.

@Amy Bauer

I have names for both CPAs and financial planners in San Diego if you’re interested or a planner in westlake village. Shoot me a PM if you want the referrals. Good luck!

@Brett Chien

LLCs will not protect you from foreclosure. Pay timely if you want to avoid that. LLCs are used mostly for protection from unsecured creditors in the event of something like a tort case or a contracts case. The lender usually has a secured interest. You'll want to be careful about triggering due on sale clauses if you transfer the property from one owner to another. The lender might require a personal guaranty if they are willing to accommodate you transferring it to your LLC from an individual.

California is a sort of beastly state when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you will be deemed to be "doing business" in California and therefore 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 will 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 will need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will need to pay registration and filing fees in at least 2 states if you don't buy CA property. Be sure to tell your accountant that you now need to file non-resident income tax returns in each state where you own property as well. Most likely the state where the property is located is where lawsuits would be brought if they are something for personal injury like a trip and fall or something of that nature because the "cause of action" arose in that state. So even if you pick a state with stronger protections like WY or NV, the cause of action arose in the state where the tenant fell, so likely that the court where the accident happened would have jurisdiction. California tends to have more laws on the books and requirements and restrictions that it can be a good idea to form a CA LLC for out of state property so that you as a CA resident are covered, and to try to have your contracts fall under the purview of CA courts in case of contract disputes. I would advise against forming the LLC on your own. Good luck!

*This post is informational only and is not to be relied upon. Readers are advised to seek professional advice. This post does not create an attorney-client or CPA-client relationship.

@Allison Meggison

Have you joined any of the local san diego networking groups?  The Outback is hosting a meeting on this topic in October.  Try reaching out to @Lynda Evans

@Jack Calhoun

If you live in CA and are managing from CA, you cannot escape the $800 minimum tax. Even if you create an AZ LLC (or any other state), so long as you are managing from California, you are "doing business" in California according to the Franchise Tax Board, and therefore subject to CA taxes. If you want to form out of state, you will need to register as a foreign LLC in california.

*This post does not create an attorney-client or a CPA-client relationship.  This post is informational only and readers are advised to seek professional advice.

@John S.

Since you have multiple homes already, an LLC may make more sense than an umbrella policy (unless you mean those are all personal residence/vacation homes and not rentals, in which case you wouldn't want them in an entity).

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.

Any lawsuits would 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). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. If you're going the umbrella insurance route, make sure 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 would 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. If you create an LLC, you will need a business account. Otherwise, if you hold them in your personal name with an umbrella you do not need a business account. If you are buying out of state, you can create an out of state LLC and register it as foreign in CA or you can create a CA LLC and register it as foreign in the state where the property is located. Either way, if you are managing from California, you are "doing business" in California and will be subject to the $800.

You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. You should still be able to get this even if the properties are not in an LLC, if you qualify.

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.

@Jake Snavely

The question of whether to create an entity is a personal decision, and there's a bunch of posts on BP about it.  If you're buying in another state - you can probably do it either way - if you form in L, you will need to register as a foreign LLC in CA. If you create a CA LLC, you will likely need to register as a foreign LLC in AL. CA takes a broad scope of what constitutes "doing business" in CA so either way you will be subject to the $800 minimum tax in CA. Not sure as to AL laws if they also have an entity level tax or minimum tax. You'll need to look into whether owning property in AL also subjects you to income tax in AL on an individual level - might need to file a AL tax return. Also look into AL's rules for agents of service of process. Having a AL-created LLC might require you to have an in-state agent for service of process, whereas filing as foreign, maybe you don't need an in-state agent.

Also, a point of caution - Bigger Pockets is a great way to get good information but California does not recognize series LLCs.  Each one would subject you to the $800 tax.  So tread with caution with advice from people who do not live in California or are not familiar with CA laws.

Along the same lines, CA generally has more complex laws in their corporations code and more requirements and such that sometimes it can make sense to create a CA-based LLC, despite an increased cost to set it up, especially since you will be subject to taxes anyway.

Also, if you're doing flips, you may want to look into an S-corp as a possible entity structure.

When you say trust, I'm not sure if you're referring to a land trust or a gift trust, or just a family/living trust.  You'll likely want to have an estate plan and family trust in place if you do not already, though it provides you no liability protection.  If you wanted to not create an entity at this point and just get an insurance policy, you would likely hold title in your family trust.

You definitely should be speaking with a CPA and attorney. Let me know if you need referrals in Southern California or San Diego.

*This post does not constitute legal advice and is not to be relied upon. This post does not create an attorney-client or CPA-client relationship. Readers should seek professional advice.

@Chayson Descisciolo

I'll PM you.  Not a dumb question, but a long answer.

@Tom R.

Did you have a contract signed to purchase the house?  There is actually law about this about who owns the property once a contract to sign is purchased and you're in the middle of it/in escrow.  If you had a signed contract, you may want to consult a real estate or property attorney.  

Otherwise, if there was no will or trust, that means the family is going to have to go through probate.  You can file a creditors claim in probate court and be paid out of the estate if it is approved.  Save your receipts and document your time if you're going to do that.  Probates in California are required to publish notice, so check your local papers and whatnot to know once the family has filed with the court.  If you send a letter to the heirs telling them you are a creditor, they should include you in the people who they give notice to of court proceedings.

*This post does not create an attorney-client relationship or a CPA-client relationship.  The information provided is for educational purposes only and is not to be relied upon.  Readers should seek professional advice.

@Chayson Descisciolo

You definitely will want to have an attorney draft up the document - I've seen too many DIY agreements that don't cover the person the way they want or thought they were covered and it ends up costing more in the long run to fix it than to just do it right the first time.  Particularly with unrelated parties, there are so many more unknowns and situations that can arise that the saying is true... you get what you pay for. 

Since you live in the great state of California, you're going to have a hard time avoiding the $800 minimum tax. Yes, LLCs are subject to the minimum tax, but limited partnerships are as well, and so are S-corporations. General partnerships are not subject to the minimum tax, but they provide no liability protection. A joint venture is treated as a general partnership. Also, limited partnerships need to have a general partner who has unlimited liability, so if you're looking for limited liability, you essentially would need to create two entities for an LP (the LP itself and an LLC to act as the GP). At that point, why not just do the LLC alone if you're trying to keep it simple. If you aren't worried about liability, then you can consider the joint venture/general partnership and look into adequate insurance. Even if you form your entity out of state, you will pay CA taxes if you are managing from CA, which equates to "doing business" in CA.

Depending on what kinds of activities you envision doing with your group, you should speak with an attorney for the right type of entity.  The analysis may change depending on if you are flipping, wholesaling, buying-and-holding, etc. and also whether you plan to use financing or not.

You'll also want to start thinking about such things as can you transfer your ownership share - what if one partner has children he wants to leave it to?  What if one has a spouse?  California is a community property state so you'll want to make sure to have adequate language and protections in your operating agreement depending on the situation.  Will all partners have full authority?  Do you want to require unanimous consent for certain actions or transactions involving a certain dollar amount?  What happens if one partner wants out and the others don't - will you have a first right of refusal included?  How will you calculate buy-out price?  What about management fees - what if one person is doing more work than the others?  And on and on... the more you can account for and discuss up front the better.  You want to make sure everyone is on the same page from the start.

Hope that helps some.  Good luck starting out!

*This post does not create an attorney-client or CPA-client relationship.  Readers are advised to seek professional advice.