Where to create an LLC

Question

I’m starting out in real estate investing, and I’m looking to buy a multi-family property in Vermont from California.  Should I create an LLC in one of the friendlier states (Wyoming or Delaware) or directly in Vermont to have a presence in the state.

Thank you in advance for any replies.

Henry

Tom S. · Answer

@Henry Valle  I'm also in the position of doing business in VT but living in CA.  All what's posted above is correct.  My CPA & attorney both recommended against the LLC as it's a lot of paperwork and expenses.  And to just get a good umbrella policy instead.

I've done that for 15 years now, running a good professional business and documenting everything.  I've never had any issues.  VT is also a somewhat anti-lawsuit state, you slip and fall on the snow outside your property, well..it's VT.  Document that you have snowplowing and sanding services, document that steps and railings are up to code, the annual inspections and checklists by the insurance company are all addressed, etc.

Also note that most conventional banks don't lend directly to LLC's.  That's a whole separate issue you can see widely debated here on BP.

Nick Robinson · Answer

@Henry Valle

The only thing/problem with smaller buildings especially when they are out of state it’s hard to cover all those costs with LLC fees, property managers etc and still make a good return.

Account Closed · Answer

I'd have to ask why are you doing an LLC in the first place?  From what I understand there are no particular tax advantages to doing so and if no partners are involved, what does it accomplish in the way of asset protection that you can't achieve through an umbrella liability policy?

Henry Valle · Answer

@Chip Marce I’ll be working with my brother and we wanted some liability protection.

Mark Frattini · Answer

@Henry Valle

Check with your CPA, insurance broker and real estate attorney. Umbrella policies are very reasonable and offer a layer of protection. Check with your CPA but I believe you would want to setup the LLC in the state where the property is located. Depending on who you ask you may or may not need to setup an LLC in California.

Henry Valle · Answer

@Tom S.  All of this information is very helpful.  I think an umbrella policy would be the better option.  Thanks for the suggestion.

Basit Siddiqi · Answer

@Henry ValleYou normally want to create the LLC in the state where you will do business in. In this case, you are considered to be doing business in VA and as a result would want to establish the LLC in VA.The issue with living in CA is that CA will also consider you to be doing business in CA. There is a $800 annual fee for an LLC that is doing business in CA.Good luck!

Henry Valle · Answer

@Katie Lepore thank you for information.  Very helpful.

Katie L. · Answer

@Henry Valle

California is a sort of beastly state when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you will likely be deemed to be "doing business" in California and therefore likely subject to CA taxes. California charges a minimum tax of $800 a year per LLC, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you will likely need to register it as a foreign LLC in California. Though, this process will be the same for the other state (if you created a CA LLC you may need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will need to pay registration and filing fees in at least 2 states if you don’t buy CA property.

This article goes into a lot of the considerations about whether to form an LLC or not: https://www.mmpph.com/wp-content/uploads/2019/04/May-2019-newsletter.pdf

Be sure to tell your accountant that you may now need to file non-resident income tax returns in each state where you own property as well. Most likely the state where the property is located is where lawsuits would be brought if they are something for personal injury like a trip and fall or something of that nature because the “cause of action” arose in that state. So even if you pick a state with stronger protections like WY or NV, the cause of action arose in the state where the tenant fell, so likely that the court where the accident happened would have jurisdiction.

California tends to have more laws on the books and requirements and restrictions that it can be a good idea to form a CA LLC for out of state property so that you as a CA resident are covered, and to try to have your contracts fall under the purview of CA courts.  It also is helpful to have a California LLC in case you ever sell that property and move into another state so that you do not need to form a new LLC altogether with new operating agreement, just re-register in the new state as a new foreign LLC.  Also, the state of formation is likely where internal disputes would be brought among LLC members, so if you and a partner live in CA, you probably want to arbitrate in CA if the two of you had a disagreement.  But, that is not always the right answer and you should speak with someone familiar with your personal situation to get advice specific to you.

*This post is informational only and is not to be relied upon.  Readers are advised to seek professional advice.  This post does not create an attorney-client or CPA-client relationship.

Where to create an LLC

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