LLC Formation

[Dan Fisher]

I know this has been discussed numerous times but here goes. I'm ready to form my single person LLC for my REI business. I'm in Illinois, and plan on doing most of my business in Illinois, but have seen on the forums that I should consider filing in Wyoming, Nevada or Delaware for maximum protection. I'm still not clear on how these states provide an extra layer of protection so I'm looking for feedback on this. Also, I was wondering which online filing companies (legalzoom,etc) is recommended. Opinions and experiences are appreciated.

[Jeffrey S. Breglio]

There are two main types of LLCs that I set up for my RE investors: A tax savings LLC and an Asset Protection LLC. They are different. The Asset Protection one is for rental properties (long term holds). Your tax savings LLC is used for pretty much everything else: flipping, wholesaling, real estate commissions. Do not mix them up or cross-use them!!

Your tax savings LLC should ALWAYS be in the state in which you reside because that's where you conduct your business.

For the asset protection LLC, my first recommendation is always the state in which you live if you have properties there.

When you have out-of-state properties, a typical scenario for my clients is that we set up an LLC in their home state, title the out-of-state property in a trust, and then make the beneficiary of the trust their LLC. This works because an LLC must be registered in any state that it's doing business, regardless of where it's set up. If the trust owns the property, and particularly if you've got a third party property manager, then you don't have to worry about registration, registered agents, fees, etc. in a bunch of different states. Trust are not registered. But as the beneficiary of the trust, the LLC provids the protection

An issue arises with the "doing business" definition. The LLC has to be doing business somewhere. So setting up, let's say, a Delaware LLC, when you live in CA, probably won't get around the CA LLC tax unless you argued to CA that you run your business our of DE and pay DE taxes. Every state wants its taxes and someone is going to collect it. So this is a discussion with your accountant and your attorney if you want to set up an LLC out of the state you live in.

Because of that "doing business" in requirement, doing LLCs out of your home state doesn't usually make sense (although, on rare occasions and specific reasons, I have created them for clients).

You family living trust provides no protection. But should be incorporated into your overall asset protection plan, usually through transfer on death agreements. DO NOT have your family trust own either of the two types of LLCs I am describing.

A "land" trust can be used for additional privacy, which can be helpful in asset protection as well.

And your Asset Protection LLC should be at least 2 members. Your Tax Savings LLC can be just one. Both should be manager-managed.

Hope that helps. Let me know if you need anything else. 

Jeff

PS. I know Lee. He's here in Utah with me. Great guy.