LLC advice when owning properties in multiple states??

[Joe Cusick]

My wife and I are just getting started in REI. We live in PA and established an LLC here earlier this year in anticipation of buying investment properties. We figured we should get one established, but the tricky thing now is we are not just looking to buy properties here in PA. As a matter of fact, we are now under contract with 2 properties in IL. We have also been looking at the Memphis market.

Is it recommended to have an LLC in each state you acquire property and then after you close, put the LLC on the deed?

Can we work off of just the one we have in PA?

We are going to obtain a personal liability insurance policy for $1MM, which I am told is a good move to further protect our personal assets.

Any thoughts or feedback is greatly appreciated!

Thank You!

[Joseph S.]

@Joe Cusick

I assume that since you already have a PA LLC you've done the due diligence on that state to ensure they hold a presumption that a business entity is a distinct legal entity and has a fairly consistent practice for determining when to pierce the corporate veil – and that this happens rarely.

Depending on the size of your portfolio it may be worth having separate entities up to determined asset levels. For example, splitting a $50M portfolio into 5 LLCs can generally ensure that if you suffer a lawsuit that wipes out one basket the others aren’t affected – essentially limiting your liability.

However, most folks with portfolios less than $10M generally don't need to consider splitting it up this way since adequate insurance coverage in a single LLC should mitigate most of the risk.

TN has both excise and franchise taxes. Unfortunately, unlike most states, TN doesn’t shield LLCs, LLPs, and S Corporations. So if you do hold TN property in an entity (even and out of state entity) other than a Sole Proprietorship or General Partnership, which don’t have the desired veil for the intended purpose in the first place, then be sure to look into getting a FONCE (family owned non-corporate entity) exemption.

If you do use the PA LLC to purchase property in TN, then you'll need to apply for a certificate of authority.

You asked whether it is recommended to purchase the property personally and then put the LLC on the deed after you acquire the property. Depending on the state this can have varying tax consequences. So the question would be why not purchase the property with the LLC in the beginning instead of transferring it after? If the answer is because of financing, then you should closely review your lenders documentation – most of them have a due-on-sale clause which could trigger when transferring to the LLC. If you're not financing and the ending location for the property is the LLC, then it's probably best to start there.

All this said, if you have a portfolio with less than $10M in assets, I'd stick with a single LLC to avoid all the extra cost and paperwork as @Douglas Skipworth mentioned.

@Doug Rose, I wasn't quite sure by the way your reply was structured, but it sounded like you said you could avoid CA tax liabilities as long as the corporation operated and did business strictly outside of CA even if you lived in CA. If so, I'd caution you to read Example 1 on page 4 of the FTB's General LLC Information Form 3556 (https://www.ftb.ca.gov/forms/misc/3556.pdf):

“Paul is a California resident and a member of a Nevada LLC. The Nevada LLC owns property in Nevada. The LLC hires a Nevada management company to collect rents and provide maintenance. Paul has the right to hire and fire the management company. He occasionally has telephone discussions from California with the management company in Nevada regarding the property. He is ultimately responsible for the property and oversees the management company. Paul conducts business in California on behalf of the LLC.”

As crazy as it sounds, simply being a member of an out of state LLC and personally residing in CA is sufficient to satisfy the "doing business" clause.