Start an LLC in the state you invest in or the state you live in?

[Aaron L Rohlin]

Hello,

I'm just getting started investing in real estate and have a tax/legal question that I'm sure everyone is going to say "contact a good CPA and/or attorney". I have emails out to both but haven't had much luck getting responses; I think I'm too small of a client to get quick responses, but I'm still going to pursue professional help. In the meantime, I'm trying this forum option to get other investors opinions and advice. Before getting a bunch of comments about using the umbrella insurance option instead of the LLC option, my investor requires the use of LLCs.

Having said all that, my question is: If I live in PA and my equal-investor (both contributing the same initial capital to start) lives in FL, but we will be investing 100% in NY (not NYC), should we start an LLC in NY? Or PA or FL? Or a different state entirely?

We'll be opening a joint bank account and contributing cash and then making cash purchases of extremely distressed properties that won't qualify for bank lending.

Thank you,

Aaron

[Martin M.]

@Aaron L Rohlin

It's very common to have the LLC that will hold the properties, created/registered in the state where the properties reside. In your case NY like the other posters are saying.

Regarding the umbrella insurance...  you may know this already, but you need it. Whether or not you have LLCs in place.

You mentioned you have tax questions. You may already know this too but mentioning just in case. The relationship between legal entities (LLC, Corporation etc) and taxes can be a bit confusing if you haven't looked at this before. I think of it this way, a legal entity is just that, a legal container or a bucket, and that container will file taxes in a specific way. How that container files, is going to depend on multiple factors and this is where a CPA knowledgeable with real estate investing comes in. Generally speaking though, from a tax perspective, for LLCs, these are "pass through" entities. I'd google that if not familiar. Also, if you're flipping these run down properties, google "dealer status".

For your attorney search, if you google asset protection attorney new york, you may find additional attorneys that could structure your entities. Once the entities are created, be sure to understand your ongoing and repeating annual document requirements/responsibilities for those entities. The entities are only as protective as the paper work associated with them.

Lastly, with you partnering with someone, that can become much more complicated from an entity and tax perspective, but it sounds like you're already aware of that. Be sure to spend the money and sit down with a business minded attorney to document the "what ifs?". If party A wants to sell a property but party B doesn't, what happens? What are the rules going to be for each party withdrawing money from the accounts that are associated with the properties? Assuming you create LLCs, who will be the LLC members, just you or you and the other investor? Would you be better off taking a simpler approach to start, where just you are the business owner and the other investor invests in your projects, and there's a contract in place between the two of you stipulating the terms and returns?

Hope this helps!