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

[Lauren Kail]

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!

[David M.]

@Lauren Kail

Well, firstly there are plenty of threads on bp regarding whether you need a LLC for asset protection, especially if you are just starting out. I'm in the camp that the overhead isn't worth it for long term rentals anyway... I maintain one for my flipping and another for my consulting...

But, why did you start one in UT? I though WY was the better one in the West coast area for anonymity? If you are trying to use it for anonymity, don't register it anywhere as a foreign entity. If you do, then your "anonymous" LLC is subject to the policies of this other STate. Weakest link principal here... Younhave to start another one and make the UT LLC be the owner of this new LLC. That will protect your anonymity... then, funds will have to transfer from the new LLC, to your UT LLC, then finally to you. You have to follow the lines of privity to maintain your corporate veil.

If you aren’t doing anything in UT and the state policies aren’t helping you, then you probably don’t need it. As you probably know, you need to have the legal entity in question recognized in the State you are operating in case you have to go to court. If you never have to go to court then it really doesn’t matter (to my understanding for passive real estate investments)

I hope this helps. Ask if there is anything else. Good luck

[Sean Morrison]

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.

[Deborah McDonough]

@Peter McDonough, thoughts? You've owned several LLC's.

[Peter McDonough]

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.

[Calvin Ozanick]

Most of my clients will start LLC's in the state where they are purchasing property. This way, each state has been filed in the state which these people own properties. Much less confusion from the get-go.

[Lauren Kail]

@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?

[Lauren Kail]

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

[David M.]

@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.

[David M.]

@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.

[Peter McDonough]

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.

[Lauren Kail]

@Caleb Bryant

Thoughts?

[David M.]

@Lauren Kail

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

[Basit Siddiqi]

@Lauren Kail

Having 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.