LLC formation for out of state investing of California resident

[Robert Mikulka]

I am looking to buy-and-hold a multi-family dwelling (2-3 unit town-home / apartment) in Dallas Ft. Worth area. I understand CA has special requirements for residents. I've read some previous posts and still have some questions about the set up. From what I can tell there are three scenarios I could consider:

1) Form an LLC in Texas, hire a registered agent there and register that LLC as a foreign corp in CA.

2) Form an LLC in CA, act as my own registered agent and register that LLC as a foreign corp in TX.

3) Form a 'holding" LLC in TX, hire a registered agent there, form a 'Management' LLC in CA that manages the TX LLC, act as my own registered agent for that LLC.

My questions:

a) Is it possible (and wise) to act as my own registered agent in CA to save $$? Does anyone have a recommendation for a registered agent firm for the out-of-state LLC's?

b) When registering as a foreign corp (in either state) do I have to do the same annual minutes, filing, and other paperwork as the actual LLC or does the paperwork, meetings etc of the actual LLC suffice (i.e. what paperwork is required of the 'foreign corp' each year).

c) What are the pro's con's of each scenario?

d) How do you specify a 'holding' vs 'management' LLC?

Any insight or advice would be appreciated.

[Scott Smith]

Robert,

California has franchise taxes for LLC's that tend to make each of your scenarios higher cost. I have seen another strategy that works well for California Investors that is not a DIY, but reduces your operating costs. You can check it out on an article

[Scott Smith]

Hit the wrong key, sorry!  The article is https://www.biggerpockets.com/blog/california-real-estate-investors-delaware-statutory-trust

[Katie L.]

@Robert Mikulka

Are you sure that you will not need a TX agent even if you register as a foreign LLC in TX? Usually most states require an in-state agent if you are doing business in that state, period, even if formed elsewhere. The residents of their state who are doing business with your LLC in TX need an in-state agent to go to for lawsuits.

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 be deemed to be "doing business" in California and therefore 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 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 will 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 now need to file non-resident income tax returns in each state where you own property as well (Texas I do not believe has an income tax though). 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. 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.

[Scott Smith]

The registered agent can be either (option A) a domestic entity in TX or a foreign entity that is registered to do business in Texas or (option B) an individual resident of the state. The foreign limited liability company cannot act as its own registered agent in Texas.

Owning the properties in a Delaware Statutory Trust avoids the franchise fees that California imposes on state and foreign LLCs for residents.

Disclaimer: This response does not constitute legal advice. We recommend you seek the counsel of an attorney familiar with your specific situation and market to ensure you make the best decisions within your real estate business.

[Ronald Rohde]

Originally posted by @Robert Mikulka:

I am looking to buy-and-hold a multi-family dwelling (2-3 unit town-home / apartment) in Dallas Ft. Worth area. I understand CA has special requirements for residents. I've read some previous posts and still have some questions about the set up. From what I can tell there are three scenarios I could consider:

1) Form an LLC in Texas, hire a registered agent there and register that LLC as a foreign corp in CA.

2) Form an LLC in CA, act as my own registered agent and register that LLC as a foreign corp in TX.

3) Form a 'holding" LLC in TX, hire a registered agent there, form a 'Management' LLC in CA that manages the TX LLC, act as my own registered agent for that LLC.

My questions:

a) Is it possible (and wise) to act as my own registered agent in CA to save $$? Does anyone have a recommendation for a registered agent firm for the out-of-state LLC's?

b) When registering as a foreign corp (in either state) do I have to do the same annual minutes, filing, and other paperwork as the actual LLC or does the paperwork, meetings etc of the actual LLC suffice (i.e. what paperwork is required of the 'foreign corp' each year).

c) What are the pro's con's of each scenario?

d) How do you specify a 'holding' vs 'management' LLC?

Any insight or advice would be appreciated.

 I have no problem with clients acting as their own RA. As long as its an address you receive mail and is reliable. Our firm offers RA services, $125/year I think its one of the cheaper options vs. CT Corp, etc.

Your LLC obligations are to the state of incorporation, not sure if you were implying "double" meetings

Holding vs management is just a matter of semantics. You can specify in the Operating Agreement, but it would come down to factual usage.

[Robert Mikulka]

Thank you all for the information.