How to pick most favorable state for incorporation

Question

Currently in the process of purchasing a residential REO in NJ, but intend on buying property in Florida over the next several months, as well.  The plan is to form an LLC, and as we are doing business in both states it seems like an incorporation can happen in either.  Florida LLC may be more favorable form a tax perspective, but if the first property is in NJ is it OK to incorporate in Florida.  There will be members from both NJ and FL. Thanks.

Jon Holdman · Answer

Do keep in mind that if you have an LLC in one state that owns properties in another state, you will have to register the LLC in the state with the properties as a "foreign entity".  That is often effectively the same process, cost, and disclosures as creating an LLC in that state.

My advice is rather than read a little about this on the internet and setting up your strategy based on that, spend some time with an attorney discussing asset protection.  The ONLY reason for creating these entities is asset protection.  They are just one part of a strategy in this regard.

Taylor West · Answer

I googled how to and where last night and I can across this article

http://www.myllc.com/which-state-to-form-llc.aspx

Sounds like some states don't require any assets to be in that state that you file in??..Nevada and Wyoming (if I understood this correctly).

Lew Payne · Answer

I concur with Jeff... I have a revocable trust here in Idaho, as well as an irrevocable trust that is domiciled in Utah by virtue of its corporate administrative trustee and bank account.  The irrevocable trust conforms to Utah Code 25-6-14 as well as Internal Revenue Code 541(c)(2) and is considered a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law - and thus, said restriction is enforceable under federal bankruptcy law.  In addition, I have spent the good part of a year refining its provisions by incorporating changes to elements that were being commonly challenged or appealed in other jurisdictions (such as the FAIR Hearing Decision 1409508) so as to obviate said challenges.  As such, said trust also complies with the new Restatement of Trusts (Third) interpretation, which blurs the lines when attempting to establish what the courts will recognize as a discretionary trust with no ascertainable standard of distribution.

Asset protection, and its underlying multiple structures, is not something that one does after reading a few books on the subject.  It's an undertaking that involves consultation with an estate planning attorney as well as a real estate attorney, once you have defined your goals.

The same applies to LLCs, especially single-member or reciprocal member - as in husband/wife - LLCs... a little knowledge can be dangerous, and litigation is the best measure of any asset protection claim.

Jeffrey S. Breglio · Answer

Antonio,

A joint venture does not, in itself, create any protection. It's a contractual arrangement. So in a JV, you should ONLY work through other entities.

A partnership does create liability protection and therefore can be made up of individuals or entities.

However, there are numerous other differences: bank accounts, bookkeeping, titling, tax allocations, etc, that are also different between the two.

Search through my website. I have numerous videos of "Partnering in Real Estate"!

Thanks,

Jeff

Jeffrey S. Breglio · Answer

Hi All. Asset protection is far more than privacy. There are numerous ways, including here in Utah, to keep personal information off both the division of corporations website and the county land records. There are even ways to hide yourself from tenants. I have many clients go the distance in privacy, and it works great. It does create some more hoop jumping and many clients don't want the extra hassle.

I take a rational approach to privacy because Lew is right, some things are just impossible to hide. But for those looking for privacy, Utah does allow private registrations. I also act as the registered agent AND the governing person (that's how you stay private in Utah, those are actually different things!). We also use asset holding trusts in combination with LLCs. When someone is looking for a client and they call me, I am not obligated to give any confidential information about the company (name of members or managers) without a court order. In other words, I run interference. I've had multiple occasions where the other party just gave up. So that does work.

BUT, if you're really looking to protect your assets, the more important consideration is the structure in which you hold them. There are different types of entities (LLCs, FLPs, Trusts, etc.) and you protect different assets in different vehicles!! We customize the structure for our clients depending on their needs. We generally stick with simple! Why?

The second most important thing in asset protection, after the legal structure, is MAINTAINING it! If you don't run it correctly, you could lose all the protection the legal structure set up. I find a lot of attorneys charging a lot to create highly complex structures that the client almost immediately screws up. The thousands they paid for the structure becomes worthless. We start simple, help you understand what you're doing, and then grow with you.

You should always seek competent legal advice when setting up ANY legal entity or asset protection plan!

Happy investing!

Jeff

Christine Lewis · Answer

Lew Payne, I understand, however I would naturally hire an atty. anyway, since I am not an atty and certainly wouldn't take any chances trying to defend myself :)

Antonio Cordeiro · Answer

This is question and not an answer:

Would it not be best for the members to form their own LLC and come at this ownership project from a JV venture perspective?

What is opinion(those in the know-not me!)of a JV versus partnership, or group forming an LLC?

Lew Payne · Answer

While your initial theory is correct (UT and NV allow your LLC to stay private - if you use a nominee to create them, that is - and if you use a nominee each year to file your annual report), all it takes for anyone to initiate a lawsuit is for them to serve the registered agent - who must be available during business hours.

I don't know why people are so hung-up on the so-called "privacy" aspect of things.  If a tenant (or anyone dealing with your so-called "private" ownership property) sustains an injury - or decides to file a suit for no reason at all - all they need to do is serve notice of process against the registered agent.  Then, as a result of you cleverly owning an LLC, you must hire an attorney - because you are NOT allowed to represent your LLC unless you have a license to practice law in that state.  Congratulations.

John Mcdaniel · Answer

Thank you for the comments - good information.  I like the privacy provided by Nevada, but the current plan is to only transact business in NJ and Florida.  It is possible that could extend to PA and Delaware in the future, but not planned  The transaction of business within the sate of incorporation is the one catch that concerns me.  Expect to incorporate in FL for the initial properties, then as things progress will look at separate LLCs.  Will do more research on your suggestions.

James Miller · Answer

To add to Christine's post about privacy, Nevada is known for having *really* good privacy laws for LLC members. In TX, you have to disclose all members of an LLC if member managed, and all managers of a manager managed LLC. Sometimes I like to recommend to my TX clients to use a trust as the manager to give some anonymity (the public records will show "ABC Management Trust" as the manager). There may be something equivalent in your jurisdiction; you should consult a lawyer in your jurisdiction.

How to pick most favorable state for incorporation

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