Entity structure for beginner CA investor

[Hari Ku]

I've devoured all Youtube videos and form posts related to setting up an appropriate entity structures. I've also spoken to a few services popular here on BP. At the end, I'm still confused.

Here is my situation

- W2 earner in CA. Have Living trust set up.

- Looking to invest in TX

- Goal is to own one or two LTRs in the next year or so and then take a decision on scaling up.

- REI for me is for passive income

- Foreign LLC registration in CA is ok. I'm ok to pay franchise tax for 1 LLC.

Ideally, I'd have set up a TX LLC to hold property and WY LLC as holding company holding individual state LLCs. However, in CA there is an added franchise tax of $800 per year per LLC, so this structure is not financially viable for small scale investing,

Anderson Business Advisors - Suggested to create a TX LLC, WY Trustee LLC and WY statutory trust. Add land trust to hold title since I'll be getting a mortgage. However, they kind of force you into a platinum membership and the upfront costs was quoted around 7k.

Royal Legal Solutions - I only did an initial call with them and didn't schedule the entity setup discussion for $97. However, going by the reviews and my conversation, they seem to promote forming Delaware Statutory Trusts for CA investors. Upfront costs would be 5k for setting up a DST.

Prime Corporate Services - Their marketing was about scheduling a 1 hour session with an attorney however I spoke to an advisor who seemed less interested in answering my questions and more in moving through the presentation and emailing me documents for setting up LLCs. They recommended WY LLC and registering it as foreign LLC in TX and CA. They will not help with foreign LLC registrations.

KKOS - I loved their transparent pricing and had an initial call with them. It looks like I might have to schedule a 1 hr consultation with them.

My fellow investors from CA, how did you get started with your entity structures? I'd love to know how your entity structures looked in the beginning and how they've evolved.

[Katie Balatbat]

@Hari Ku

All of those costs and fees made my mind swell a bit.  If you're just starting out, it seems a bit overly complicated to me, but again, you have to do what is right for you and we are not privy to all of the relevant information on this forum that maybe these advisors may know for your particular situation.  I also don't think there's necessarily a right or wrong answer and certainly no one-way-fits-all pathway forward.

As you are aware, California is generally more cumbersome than other states 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 as a CA resident. It seems that you're already aware that CA doesn't recognize series LLCs so that having multiple LLCs while being a CA resident can be costly.

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. Of course, with all things, the answers to all these matters will depend on the circumstances.

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 and/or spouse live in CA, you probably want to arbitrate in CA if the two of you had a disagreement. It also is helpful to your estate planning attorney that they understand the documents better to put ownership in your CA trust. 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.