LLC options for California?

[Taylor McClung]

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]

@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.