Started LLC out of state, reconsidering that decision, now what?

Question

I started a single member LLC in Utah upon recommendation very early in my real estate journey, probably sooner than I should have. I'm finally going to be "doing business" and purchasing a property to hold this year in Alabama. It is time for my annual renewal in Utah plus Registered Agent fee, and I'm trying to determine if it is a good idea to renew in Utah and register as a foreign entity here in AL when the time comes, or if I should just dissolve it and start a new domestic entity in AL. My concern is multiple state filing fees, multiple returns, etc.

Any advice from a CPA, RE Attorney, or fellow LLC owner would be so much appreciated! Thanks, folks!

Peter McDonough · Answer

Get rid of it, and replace with an umbrella insurance policy.

Your single member LLC will not provide asset protection. It's pretty easy to pierce the corporate veil and go after your personal assets. Additionally, the LLC ownership of your rental property will increase the lending and reserve requirements for the property, meaning the investment will be less profitable, while filing the additional tax return for the LLC and ensuring the LLC has adequate cash flow to stay solvent while simultaneously trying to not intermingle personal and LLC funds to uphold the asset protecting capability of the LLC is a whole lot of hassle. The umbrella policy is a couple hundred bucks, and if you get sued, the insurance company is incentivized to hire a lawyer to protect you and keep them from having to pay out a large settlement.

David M. · Answer

@Lauren Kail

Yes.  A LLC doesn't actually change anything for tax purposes.  Its really just for asset protection.  In fact, if you are a single member LLC the IRS considers you a "disregarded entity."  This means for tax accounting purposes they don't see an additional entity.  There is no separate tax return to file.  You just file SchE for your rentals (or SchC for other business activities).  If you are a multi-member, you file a partnership return which spits outa  K-1 form for you to file on your personal return.

Either way, the deductions and everything else are all the same.

Sean Morrison · Answer

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

As a general rule, real estate holding LLCs should be created in the same state as the property. While some states have better protections than others, when it comes to real estate courts only want to recognize local protections. If you want your Utah LLC as a holding LLC, you could do that, but it's just more paperwork.

Basit Siddiqi · Answer

@Lauren KailHaving an LLC registered within a specific state doesn't necessarily increase state income tax filing fees.If you live in Alabama and your property is in Alabama. Just because you create an LLC in another state make you have to file a state tax return with that state. Most states will only require you to file a state return with their state if there is activity(property, payroll or sales) within that state.But yes - there may be other reasons for dissolving the LLC in utah and creating one that only does business in Utah.You can avoid paying for the registered agent fees and the annual LLC upkeep fees.

David M. · Answer

@Lauren Kail

Do you have any more questions?  Have your questions and/or concerns been answered?

Lauren Kail · Answer

@Caleb Bryant

Thoughts?

Peter McDonough · Answer

Get the umbrella from the same company you have the house insured with, to make management easy.Deductions/expenses can actually be better, esp if your income is below the IRS limit for such things, or if you or your spouse qualify as a real estate professional.

David M. · Answer

@Lauren Kail

Since I have my rentals in my personal name, I just get the umbrella coverage from my "regular" insurance company.  Only because they would cover 3 max rental properties, I went to an insurance broker to get the individual policies for my additional rentals.  I don't know about other States, but the coverage form docs deem to be pretty well standardized.  So, it becomes cost / convenience / customer service.  I prefer the latter two over trying to save a few bucks shopping around.

Lauren Kail · Answer

@Peter McDonough Also, which insurance company would you recommend for umbrella policies and why? Thank you!!

Lauren Kail · Answer

@Peter McDonough Would I still be able to take advantage of tax deductions from ordinary and necessary business expenses without having an LLC, but simply by owning investment properties?

Started LLC out of state, reconsidering that decision, now what?

Most Popular Reply