Form an LLC in Nevada and operate out of Illinois?

Question

Hello BP,

I'm planning to build 10+ spec homes in state of Illinois over next a couple of years. The plan is to build and rent and perhaps sell off a few as we go along. I have a partner who lives locally and will be handling the construction side. I will be taking care of the business side. As for the equity, I will be providing 75% and my partner 25% and we will be splitting the profit 50/50.

Whats would be the best way to structure the partnership?

My main concerns are:

- Tax planning

- Asset protection

- Flexibility to add more equity partners later on.

I would like to set up the business correctly at the beginning. I am sure I need to consult with an attorney but would like to get some feedback.

A REI friend advised me forming a LLC in Nevada and make it operating out of state of Illinois may be the way to go for the tax benefits and asset protection. Has anyone done similar?

Thanks,

-Steve

Jeff S. · Answer

And Account Closed Congratulations, and don’t forget to file a state tax return and pay the $800 minimum franchise tax. Jeff

Mike McDermott · Answer

Account Closed As stated above, there is no advantage of forming an LLC in Nevada, or anywhere else for that matter, than in Illinois. There is a HUGE advantage in being in Illinois, and that advantage is the Series LLC Model that Illinois has adopted. There is a very cogent and well written article on this here: http://www.worldservicesgroup.com/publications.asp?action=article&artid=1865 It seems as though your legislature has given some serious thought to this body of law. Wisconsin has a law that implies a series is possible, but it is horribly written and has never been tested in court. Illinois' law appears to be drafted with great care, and the law addresses various situations that make it appealing to running multiple businesses or holding discrete assets. As @Tom Goans says, seek legal counsel. Reading an article on the internet is not the same seeking credible legal advice, but it can point you in the right direction and give you the right questions to ask when interviewing an attorney. Good luck with this!

David Krulac · Answer

Account Closed I am neither an attorney or CPA. imho if the property is in Ill. then you are operating in Ill. whether you have an Ill entity or a Nevada entity. You should have the entity in the state where it does the majority of its business. If somebody slips and falls on your property in Ill. they will 100% of the times sue you in Ill. not in Nevada. Being anonymous is one advantage of a Nevada entity, but you can do that in other ways in any state, you don't need to go top Nevada, except on vacation.

Steven Hamilton II · Answer

Account Closed , I would just form it in Illinois. You will have to register as a Nevada LLC doing business in IL and pay the same fees. There would be more cost doing it the way you described. Also if you are sued, you will be subject to IL law. Do either of you have existing corporations? If so, I would make those the partners in a partnership. Otherwise, I'd consider having it taxed as a corporation as neither of you want to be subject to Self-Employment Tax on your entire share of profits(That is what would happen with a partnership).

Account Closed · Answer

@Steven Hamilton II Thanks for your support! Jeff S Na Thanks for the info. It appears there are ways to avoid the california franchise tax but it all seem to be a lot of hassle or could be seen as tax evasion. @David Krulac Yup thats the plan for now to keep things simple. -Steve

Account Closed · Answer

@ Tom Goans Sure thing I plan to seek legal professional advice before making the decision. Thanks for you advice. @Steven Hamilton II I see that you are from Illinois and know your local tax laws. I will most likely form a LLC in state of Illinois to keep things simple for now. I really appreciate your advice. Terry Portier Thanks for the article comparing the benefits forming LLC in DE, NV and WY. I see WY is up there and seems to be the most "incorporation friendly" state. This insight will help me evaluating deals out of states going forward. -Steve

Steven Hamilton II · Answer

Terry Portier , It would be taxed to Illinois regardless as the income is earned in Illinois Yes, there is a 1.5% replacement tax on passed through income in Illinois before it gets to the shareholders. No matter where your LLC is originated it would be subject to the IL replacement tax on IL income AND it would be required to register with the Secretary of State as a foreign corporation/LLC doing business in Illinois.

Steven Hamilton II · Answer

@Steve Bong , If you have any questions, don't hesitate to ask. @Terry Portier , I have clients in the majority of the 50 states. -Steven

Terry Portier · Answer

@Steven Hamilton II I'll take it then you stay current on tax code in IL, but definitely not a rule of thumb for all states. Here in KS in 2013 new code passive from corp income including LLC are not taxed nor is there a franchise tax. Only question left is there a better legal process in another state like NV/DE/WY, taxes and fees are second too, if you are out mainly to protect your career/assets. DE and NV has a long history of judge(no juries) ruled corporate law, WY is up and coming. Those states have seen alot of 'flexability' and WY created the LLC. If you have a solid LLC with solid contracts, business practices, and know what you are doing with sub-contractor/employee agreements/contracts, and commercial liability and WC insurance you should be fine in IL. Read your commercial insurance policies in depth. Read the labor laws in your state/fed as to how to treat subs or employees. You don't need an attorney to register that part is easy, to get the Articles of Organization. You may need one for an Operating Agreement and all related contracts to the LLC. Good luck!

Terry Portier · Answer

Call the IL dept of revenue and ask if corporate pass through income is taxed and is there a franchise tax. If the answer is no like here in KS, DE, NV, and WY to name a few, it is a no brainer file domestic, unless your state is hard on corporate law and you are worried about being sued. If the answer is no to foreign, yes to domestic and W2 wage, file in another state, but look at WY it has more benes. https://www.myusacorporation.com/articles/delaware-vs-nevada-vs-wyoming.html You don't need professional(s) for answers to basic questions, your state should have a tax assist as does the IRS. Go find a case where real property was forced back to it's resident district court state in the case of builder's foreign LLC, with a charging order or land-lord tenant judgement, if you find it please post it up Id like to see it ;)