LLC: Which State Is Best?

[Michael Glaser]

Closed on my first rental home this spring. It's been two months with renters in the property in Kansas City. I'm looking to start an LLC before my next, but I'm also out of the country about 7 months a year while I'm a resident of California.

I have family in Delaware who I see a few times a year, so I'm thinking why not?

Anyone have any experience in starting your LLC/Corp in a business friendly states such as DE or NV?

If so what are the advantages over Kansas or Missouri?

[Naseer Khan]

@Michael Glaser As a California resident, you will still be subject to the California LLC franchise tax, even if your rental property is located outside California due to CA's far reaching rules. For example, Nick is a California resident and a member of a Nevada LLC. The Nevada LLC owns property in Nevada. The LLC hires a Nevada management company to collect rents and provide maintenance. Nick has the right to hire and fire the management company. He occasionally has telephone discussions from California with the management company in Nevada regarding the property. He is ultimately responsible for the property and oversees the management company. Nick is considered to be conducting business in California on behalf of the LLC. The LLC must file Form 568 and pay the franchise tax. (FTB 3556 LLC MEO (REV 01-2015).)

Accordingly, you can open a Delaware LLC but you will still have to register as a foreign business LLC in California because you are considered to be conducting business in California, merely by you having some management control of the property and being a CA resident. On the same token, if you setup a California LLC and you decide to transfer your Kansas City property to the CA LLC, you will have to file as a foreign registered business in Missouri and pay the same fees as other LLCs because you are conducting business in Missouri.

Either way, you will have to pay the CA LLC franchise tax, so you are better off opening a CA LLC as your primary entity and then open LLCs in other states that you invest. The CA LLC can be a member of the other state LLCs, so all income can flow to your CA LLC.

This can get expensive (primarily from CA's fees) so you will have to assess your cash flow situation to determine if it's worth it. However, I generally recommend using business entities for liability protection, especially if you plan to buy more properties. essentially, this is a decision based on risk averseness and cash flow. Let me know if you need additional help. 

This response neither constitutes legal or tax advice nor establishes an attorney-client relationship. Inquirers must seek the advice of their own legal counsel prior to undertaking any course of action related to this inquiry.