Attorney & CPA giving conflicting advice... help?

[Victoria Townsend]

Hi BP,

I live in California and I'm forming an LLC with another person (who also lives in California) in order to buy 5-10 rental properties (small multis) this year in Kansas & Ohio.

My CPA is telling me that I should just create LLCs in Kansas & Ohio, and that I don't need to create one in CA - thus saving me the $800/yr fee. 

My attorney is telling me that I absolutely need to create one in CA, and that the Franchise Tax Board will penalize me and I will pay more than the $800/yr. And that after I form an LLC in CA, I should just get business licenses in Kansas & Ohio whenever I buy.

It's really weird to hear such conflicting advice, so I'm hoping to hear some first hand experience from other members of BP.

How do you have your entity structured for out-of-state rentals? 

Do you just have it where YOU live in, or just where the properties are, or both?

Also, do most people just create their entities over Legalzoom?

[Naseer Khan]

@Victoria Townsend 

I work with a lot of out of state investors who are dealing with the same issue as you. Here is a response that I posted in the past about this subject with some relevant information on your situation: 

As a California resident, you will still be subject to the California LLC franchise tax, even if your rental property is located outside California due to CA's broad interpretation of "doing business in California."

For example, Nick is a California resident and a member of a Nevada LLC that owns property in Nevada. The LLC hires a Nevada management company to collect rents and provide maintenance. Nick 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. Nick is considered to be conducting business in California on behalf of the LLC. Accordingly, The LLC must file Form 568 and pay the franchise tax. (FTB 3556 LLC MEO (REV 01-2015).)

Accordingly, you can open a Ohio LLC but you will still have to register as a foreign business LLC in California because you are considered to be conducting business in California, merely by you having some management control of the property and being a CA resident. On the same token, if you setup a California LLC and you decide to transfer your Ohio property to the CA LLC, you will have to file as a foreign registered business in Ohio and pay the same fees as other Ohio LLCs because you are conducting business in Ohio.

Either way, you will have to pay the CA LLC franchise tax, along with the Ohio LLC tax/fee. You cannot simply obtain a business license in Ohio and run your California LLC in Ohio.

This can get expensive (primarily from CA's fees) so you will have to assess your cash flow situation to determine if it's worth it. However, I generally recommend using business entities for liability protection, especially if you plan to buy more properties. Overall, this is a decision based on risk averseness and cash flow. 

Setting up the LLC is not too difficult and you may be able to figure it on your own and then have an attorney draft the Operating agreement. However, the forms can be a bit daunting and burdensome for many people, and they just feel more comfortable having an attorney take care of it. Let me know if you need additional help.

I am only licensed in California, so my interpretation of other states' laws are generalizations and may not apply to that particular state. You will have to consult a local attorney. 

This response neither constitutes legal or tax advice nor establishes an attorney-client relationship. Inquirers must seek the advice of their own legal counsel prior to undertaking any course of action related to this inquiry.