LLC options for California?

Question

Hello BP,

Has anyone had experience with setting up cost-effective LLCs in California?

I have two  multi-family properties (4+2) that have appreciated to the point where I'm concerned someone might sue me one day and get a decent settlement. To avoid that as well as set up LLCs for partnerships in the near-future, I'm searching for a cost-effective way to make an LLC a viable option. Any input is greatly appreciated.

Brian Burke · Answer

@Taylor McClung "cost-effective" and "California" are mutually exclusive terms!  LOL

To do this right and get the protections that LLC's are intended to provide, you should have an attorney help you.  You can go to CA's Secretary of State website www.sos.ca.gov and download the LLC-1 form and file it, then your LLC will be formed. It doesn't cost too much. Then you can deed properties into the name of the LLC. Now the important part: you need an operating agreement that is properly drafted. This is where the attorney comes in.  Don't fall for the do-it-yourself operating agreements that you can download from the Internet.

Now you know HOW to do it, but the real question is should you do it at all?  You should get the advice of an experienced attorney, CPA, and insurance consultant before making your decision.  It's my opinion, which is NOT legal advice (I'm not an attorney), that good insurance policies with a large umbrella policy can address your concern as effectively (or more so) than an entity.

You asked about a cost effective way to set up an LLC, but what you didn't ask about is a cost effective way to MAINTAIN an LLC in California. Each LLC will cost a minimum of $800 per year in franchise fees to the state, a gross receipts tax that can cost up to $11,790 per year (depending on gross income--NOT net!), and the cost for your tax preparer to prepare the state's informational return (and if there is more than one member, a federal return too).  On top of that, you'll likely pay higher borrowing rates for the type of properties you own.  None of this means that you shouldn't own property in an entity under the right circumstances, it's just to illustrate that its a decision that shouldn't be taken lightly.

Brian Burke · Answer

@Taylor McClung setting up an entity to "protect assets" and setting up an entity so you can segregate investor capital are two completely different things.  I'm not a big believer in the former, but it's an absolute necessity for the latter.  That said, I suggest that you form the entity when you are ready to take capital, no need to do it sooner and pay the state unnecessary fees until you have to.

Taylor McClung · Answer

@Brian Burke , also, your suggestion about the umbrella policy may help to solve one problem of personal liability. I will look into that. I am wanting to set up some sort of business entity whether LLC or LP as @David C. suggested. This is more to be able to have an avenue for raising capital with others to do more REI.

@Bobby Narinov, the elusiveness of your idea is intriguing. I'm conservative so I believe one day they will figure out where my money really is. Ha ha. Kind of makes me feel like I'm laundering money doing it that way. I know I wouldn't be. Point taken.

Taylor McClung · Answer

@Brian Burke, I really appreciate the time you put into your answer. I love you're statement, "cost-effective" and "California" are mutually exclusive terms!  LOL" This can be very true here in CA. As I'm racking my head for answers to how to protect assests, a new frustration is beginning to overshadow me, "Why can't California be more business friendly?" Think about how much money the state could make if we started attracted more people instead of driving them away to other states for business reasons! We could have a much better economy I'm only scratching the surface, and I digress.

Account Closed · Answer

Another thought is to form a LP (Limited Partnership) instead of a LLC, thereby avoiding the gross receipts tax Brian Burke mentioned.  There are pluses and minuses to this, talk with you tax and legal adviser ... I am neither.

Bobby Narinov · Answer

My advice to you - pull the money out of those properties and invest them elsewhere. No-one is going to target a property(file a frivolous lawsuit) that is 80% owned by a bank. And the banks have pretty good lawyers too.

Finding your total net-worth is difficult especially if it is spread across the 50 continental US states.

LLC options for California?

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