@Regan Moore
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 need to pay registration and filing fees in at least 2
states if you don't buy CA property.
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.
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.
