Which state should I create my LLC in?

Question

My brother and I live in California and will be partnering in investments so we want to form an LLC. We will be investing in Ohio for the time being. Which state should we form our LLC in?

Christopher Smith · Answer

Do you really need an LLC? I've been invested in OH rentals for well over 20 years and am a CA resident. I have absolutely no need whatsoever for an LLC and am very glad I don't have one because of the expense of setting it up, the ongoing filing fees and the fact that my insurance provides far more than adequate liability coverage.

Jessica Beard · Answer

@Brian Eastman thank you for your reply. I have no idea what business nexus is, I will have to look that up.

Brian Eastman · Answer

@Jessica Beard

You should consult with an attorney.  This question is more complex than any answers you will get from a web forum.

Regardless of which state the LLC is setup in, you will have filing obligations in any state you actually create business nexus in.  You will also personally have obligations with the state of California even if the LLC and all of it's activities are out of state.  Your residency and actions of administering the LLC in any way create California nexus.

Christopher Smith · Answer

Sure

1) Select and aquire solid properties built by top shelf home builders

2) Acquire these properties in good neighborhoods that attract quality tenants that have an incentive to protect their own reputation so they won't destroy yours or your property or engage in conduct detrimental to all.

3) Put into place solid property management that understands that their role isn't just to collect rent and fix toilets, but to protect you from liability in all areas that flow from property management like fully vetted tenant selection processes.

4) Adequate solid property casualty and liability insurance for each property.

5) As/if necessary umbrella insurance coverage tailored to your personal risk profile and risk mitigation goals.

If I had a nickel for every Yahoo on BP that thought an LLC was the answer to all his real estate dreams I'd have Bill Gates money.

In my opinion never has so much been spent, by so many, for so little.

Its become little more than an emotional crutch that provides an excuse for irresponsible property selection and management which long term may actually be counter productive as far as true risk mitigation is involved.

Cathryn Sta · Answer

@Jessica Beard

I lived in CA when I bought my OOS rental and was talked into opening an LLC.  It was a huge waste of money and I dissolved it.  My CPA at the time was an idiot.  Plus, you have to pay the $800 fee in CA regardless because you live there.

Christopher Smith · Answer

That then would be the same due diligence you have already applied to your other activities now applied to what would presumably be your partnership agreement if it is your intention to create one.

However, you don't necessarily need an LLC to create a partnership, and to take that one step further you don't necessarily need a partnership to have a joint business activity with another party.

Jessica Beard · Answer

@Christopher Smith I have all of those things in place. What is new to me going forward will be partnering with someone.

@Eamonn McElroy thank you for the tip! It's always great to know these things ahead of time.

Jessica Beard · Answer

Thank you all for your helpful replies and the articles you referred me to.

@Christopher Smith The LLC is something we are looking into because we will be partnering and want to keep our business separate from our personal finances, but we are still researching and are open to other ideas. Do you have any other recommendations to set up a partnership?

Eamonn McElroy · Answer

You mentioned "our LLC" relating to you and your brother.

You are creating a partnership tax entity for federal income tax purposes and will be required to file a 1065 annually, along with applicable state and local partnership income tax returns.

This situation should be discussed with your attorney and CPA.

Katie L. · Answer

@Jessica Beard

California is a sort of beastly state when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you will likely be deemed to be "doing business" in California and therefore likely subject to CA taxes. California charges a minimum tax of $800 a year per LLC, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you will likely need to register it as a foreign LLC in California. Though, this process will be the same for the other state (if you created a CA LLC you may need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will probably need to pay registration and filing fees in at least 2 states if you don’t buy CA property.

This article goes into a lot of the considerations about whether to form an LLC or not: https://www.mmpph.com/wp-content/uploads/2019/04/May-2019-newsletter.pdf

Be sure to tell your accountant that you may now need to file non-resident income tax returns in each state where you own property as well. Most likely the state where the property is located is where lawsuits would be brought if they are something for personal injury like a trip and fall or something of that nature because the “cause of action” arose in that state. So even if you pick a state with stronger protections like WY or NV, the cause of action arose in the state where the tenant fell, so likely that the court where the accident happened would have jurisdiction.

California tends to have more laws on the books and requirements and restrictions that it can be a good idea to form a CA LLC for out of state property so that you as a CA resident are covered, and to try to have your contracts fall under the purview of CA courts.  It also is helpful to have a California LLC in case you ever sell that property and move into another state so that you do not need to form a new LLC altogether with new operating agreement, just re-register in the new state as a new foreign LLC.  Also, the state of formation is likely where internal disputes would be brought among LLC members, so if you and a partner live in CA, you probably want to arbitrate in CA if the two of you had a disagreement.  But, that is not always the right answer and you should speak with someone familiar with your personal situation to get advice specific to you.

*This post is informational only and is not to be relied upon.  Readers are advised to seek professional advice.  This post does not create an attorney-client or CPA-client relationship.

Which state should I create my LLC in?

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