Is it necessary to form an entity in CA if investing out of state

[Sean Willette]

Hi everyone, my brother/business partner and I have a call with our CPA on Monday. We have a quick question that maybe some seasoned investors can help us with.

We live in CA, are going to partner up on an LP deal in AZ, and then in FL. Is it even necessary to form an entity in CA? It seems like we only need to form an entity in the state where we’re investing, assuming we obviously report any income we send from our entity to ourselves.

We just don't want to form an LLC and pay $800 per year if it's not needed. I'm sure our CPA will help, but we're eager to know so we can take next steps in our biz.

Thank you in advance for your time!

[Jason Marino]

Hi Sean,

My understanding is that, if you are a California resident with an LLC anywhere, California still imposes the $800.00 minimum franchise tax on that entity. I have heard about California investors that attempt to avoid this franchise tax with a foreign LLC, but there is a risk in not reporting your ownership. California can impose fines and try to recover the lost franchise tax on the entity. A common method of avoiding the franchise tax in California legally is the use of a Statutory Trust. Examples of these entities are the Delaware Statutory Trust and the Wyoming Statutory Trust. These are Trusts that have similar asset protection to a Corporation but are governed by Statutes in the State where they are formed. Statutory Trusts are very efficient holding entities.