California Dreaming (Entity addition)

[Matt Hays]

I've been renting out a single family residence in San Bernardino county California for approx 8 years, and have been relying on insurance as my sole protection.

I wanted to level up my asset protection game by creating an LLC, but also want to invest in other states (specifically the Carolinas).

So I've added complexity where it wasn't needed(potentially)?

I was thinking of starting a Series LLC / Single member LLC combo, with the former holding assets, and the latter as management. Come purchasing time, I can spin up a new cell in the series, and chug along. That's the hope at least.

The rub is, California has turned into an absolute cluster *ahem* to understand. 

Ive been meeting with attorneys and CPA's in CA/TX, and in every conversation the following sentence is spoken:

"you'll have to check with a [CPA/Attorney] in [CA/TX] to answer that" 

not complaining! That's solid advice

I just need a sanity check to make sure this is worth pursuing, a valid pattern/architecture, and worth the squeeze.

Since I get to create an entity structure from scratch I want to do it right and fully understand what I'm getting into.

I might be over thinking this by planning for too much at once? I just want to make sure I'm actually protected, and don't put myself in a bad tax situation.

Criticisms, corrections, and shaming welcomed, this is my first post here, and will be forever owe a debt of gratitude.

[Katie L.]

@Matt Hays

There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc.

Any lawsuits would be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. If you're going the umbrella insurance route, make sure it will cover you for several things including just the routine slip and fall (like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.

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. California does not recognize series LLCs so you may want to do some research here.

You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. You should still be able to get this even if the properties are not in an LLC, if you qualify.

These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.

*This post does not create an attorney-client or CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.