Should I set up an LLC in Arizona or California?

Question

Naseer Khan · Answer

@Asia Zdziarska @Andrew Wong

As a California resident, you will still be subject to the annual $800 California LLC franchise tax, even if your rental property is located outside California due to CA's broad interpretation of "doing business in California."

For example, Nick is a California resident and a member of a Nevada LLC. The Nevada LLC owns property in Nevada. The LLC hires a Nevada management company to collect rents and provide maintenance. Nick has the right to hire and fire the management company. He occasionally has telephone discussions from California with the management company in Nevada regarding the property. He is ultimately responsible for the property and oversees the management company. Nick is considered to be conducting business in California on behalf of the LLC. The LLC must file Form 568 and pay the franchise tax. (FTB 3556 LLC MEO (REV 01-2015).)

Accordingly, you can open an Arizona LLC but you will still have to register as a foreign business LLC in California because you are considered to be conducting business in California, merely by you having some management control of the property and being a CA resident. On the same token, if you setup a California LLC and you decide to transfer your Arizona property to the CA LLC, you will have to file as a foreign registered business in Arizona and pay the Arizona LLC fees because you are conducting business in Arizona.

Either way, you will have to pay the CA LLC franchise tax, so one way to approach this is to  open a CA LLC as your primary entity and then open LLCs in other states that you invest. The CA LLC can be a member of the other state's LLCs, so all income can flow to your CA LLC.

This can get expensive (primarily from CA's fees) so you will have to assess your cash flow situation to determine if it's worth it. However, I generally recommend using business entities for liability protection, especially if you plan to buy more properties. Essentially, this is a decision based on risk averseness and cash flow. Let me know if you need additional help.

This response neither constitutes legal or tax advice nor establishes an attorney-client relationship. Inquirers must seek the advice of their own legal counsel prior to undertaking any course of action related to this inquiry.

Anthony Gayden · Answer

It is extremely inexpensive and easy to set up an LLC an Arizona. I don't think I came out of pocket more than $150, and that includes advertising it in the local newspaper.

Rachael Phillips · Answer

Hi @Naseer Khan, I have a sort of similar situation and was wondering if you could advise on my strategy of attack with LLCs. I currently have a condo in AZ, it is not on an LLC at all just yet, but I would like it to be. However, I am purchasing an investment home in CA that I would like to put on an LLC as well. This house has not been purchased yet, but I want to get the LLC before it is so that when it is purchased, I can put it on the LLC.

My dilemma is that I am not sure if I should get a CA LLC then put the AZ property on it later as well, get an AZ LLC and put the CA and then the AZ property on it or get two separate LLCs (one in AZ and one in CA) and keep them separate. The reason I ask because you explained a similar, if not identical situation above is that I will be living in CA for only a few months and will be moving to another state entirely (not entirely sure which one yet because I will be buying a primary residence somewhere new, but it will not be on an LLC yet because it will be my primary residence that I live in and rent out).

So, with that being said, which of those 3 choices do you think is the best? Any advice is super helpful, thank you!

Asia Zdziarska · Answer

Thank you @Naseer Khan.

Your advice is very valuable and much appreciated.

Naseer Khan · Answer

@Asia Zdziarska

That example that I provided above is directly from the California Franchise Tax Board regulations on LLCs, so if your situation sounds similar to that example, then that is how the FTB will treat it.  It appears that your situation is similar because you are the owner of the Arizona LLC (which owns the property), you are ultimately responsible for the property, and you have some degree of control over the management company.  If you received guidance that states otherwise, then there may be other factors that are taken into consideration. This assessment is based on the FTB's broad interpretation of what is considered "doing business in California."

This response neither constitutes legal or tax advice nor establishes an attorney-client relationship. Inquirers must seek the advice of their own legal counsel prior to undertaking any course of action related to this inquiry.

Asia Zdziarska · Answer

Thank you all!! That is super useful information.

@Naseer Khan

I have been advised that if the properties are being managed by a property management company in Arizona then we can open an Arizona based LLC and only pay local Arizona LLC fees which attract a once off fee rather than an annual one. And can be investors in the property rather than being deemed to be doing business in California. What do you think?

Steve Vaughan · Answer

I have LLCs for my commercial 5+ unit apt buildings. My first one I established in 2005.

As a general rule, I don't bother placing residential property that has debt on it in LLCs.  Lots of potential problems there.  I have had no liability or asset protection problems in 13 years of acting above board and carrying good insurance on my little residential properties.

I have read that CA will charge you $800/yr to have any LLC in any state if you are a resident of CA.  2 LLCs?  $1600.  Ouch.

Most states also require businesses to file quarterly B&O taxes with their dept of revenue.  Check in AZ and CA if that will apply.  That's no fun either.

Filing the annual renewals with the state is easy and inexpensive ($71) here in WA.  Even the annual IRS filing isn't too bad I have found, but it is additional.  Partnership returns, k-1's,  etc.

What is your reason for wanting to put little residential properties inside a commercial business entity @Asia Zdziarska?

Anthony Gayden · Answer

@Steve Vaughan

I tend to agree in terms of residential property with debt. Knowing my luck, I would be the one with whom the bank has a problem.

I will definitely look at moving my properties to an LLC once they are paid off.

Andrew Wong · Answer

In CA, even if you have a LLC out of state, if you file income tax for your LLC, you'll have to register it on CA.

I've been looking into this, hoping to find someone to advise me on an umbrella LLC or series LLC.

Should I set up an LLC in Arizona or California?

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