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

Question

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. · Answer

@Aaron L RohlinIt'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!

Megan Templeton · Answer

Hi there! I would recommend setting the LLC up in NY if that is where you will exclusively invest. Have the LLC in the state of the properties will allow you to take in state actions such as evictions quicker.

Aaron L Rohlin · Answer

Thanks for the advice, Chris! I should have been more clear on what I meant with pursuing professional help. I have emails out to two NY law firms and placed a follow up call with one of them and the secretary took my information and said they will respond as soon as possible. The emails were a week old before I called the office. All of my communications I've asked for quotes on consultations, i.e. I fully intend to have to pay for the legal advice. I prefaced my emails to both firms with about 3 of my 10+ questions so they know what type of business I'm trying to start and the area of law they would be advising on. I don't want to give the impression that these law offices are no good. They are reputable firms in the area, I think they are just very busy. I still intend to pursue their paid services, I just like to hear free advice from people like yourself. Thanks again.

Chris Davidson · Answer

@Aaron L Rohlin Granted I am not a CPA or Attorney, but I would assume you have to register to do business in NY, and if you are just doing on property I would assume just do it in NY. However FL doesn't have a personal income tax, and I think PA and NY do, so if you register in FL your partner may not have to pay as much in taxes, but I am sure NY is going to get their cut one way or another.However if you feel you are too small to get a response book some time and pay for the time, and you will get your answer. Once you pay them you are a client and you will get a professional opinion. My personal thoughts if you want to be taken as a professional act as one, and free advise is often worth what it cost.