All Forum Posts by: Naseer Khan

@Bony Mathew 

1) Question: Are the Sub LLCs just going to hold rental property or short term rentals? If they are simply holding long term rental property, then the income from those properties is passive income and is not subject to self employment tax. Accordingly, you would not need the S Corp election for those entities. However, if they were short term rentals (less than 7 days at a time - like airbnb) then the S Corp election would make sense since the income becomes active income and is subject to self employment tax. FYI - the S Corp election allows for tax planning that helps reduce self employment tax. 

2) See above discussion about whether these are long term rentals or short term rentals. If long term rental, then no need for salary and distributions. 

3) There is no need to separate each property into its own LLC. The number of properties in each LLC should correlate to the amount of equity you might lose in the case of a lawsuit. Since you plan to finance most properties, you likely do not have much equity, so you could place all or several properties in one LLC. If you were to get sued, you would not lose much due to the debt on the properties. However, if the properties are paid off, then you want to start separating them based on your risk level and equity level. Note that this is just one factor to consider when separating properties in LLCs.

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.

@Marc Beaulieu There isn't a specific set of rules to determine what will cause a judge to disregard an LLC and treat it as an "alter-ego" of the owners. But Bank accounts in the name of the LLC definitely shows a separation from entity and owner. However, in your situation (if you were to get sued), your lawyer could argue that your account is not commingled with personal accounts and it has been purely a business account since inception. Then it would be up to the judge to decide.

With that said, why take the risk of losing a case when all you have to do it simply get a business tax ID number from the IRS (for free) and setup a business account. 

Also, make sure you have an operating agreement with your partner and a good insurance policy to cover any costs of litigation. An umbrella policy may even cover your legal costs if you are sued jointly with the LLC.

@Kayla Peterson Another thing to note is that as a self-employed individual, you should be making estimated quarterly tax payments to the IRS or you may be subject to an IRS fine at the end of the year. Of course this depends on how much money you make and the frequency of deals. 

@Kent Baltare

As a resident of California, you will be taxed on income from all sources, whether earned in California or outside. You should be able to receive a tax credit if you paid state income taxes in another state. 

My law office works primarily with real estate investors throughout California. As an investor myself, I have practical knowledge in the different methods of investing (wholesaling, seller finance, rehabs, joint ventures etc). We help clients setup their real estate business in the most efficient manner and provide guidance along the way. Feel free to reach out.

My law office works primarily with real estate investors throughout California. As an investor myself, I have practical knowledge in the different methods of investing (wholesaling, seller finance, rehabs, joint ventures etc). We help clients setup their real estate business in the most efficient manner and provide guidance along the way. Feel free to reach out. 

@Kent Baltare

1) If you setup an LLC in TN to hold the property, you are still considered to be "conducting business" in CA because you living in CA and are a member of an out-of-state LLC. CA has very overreaching laws when in comes to out of state businesses. Thus, you would be on the hook for the $800 CA franchise tax fee.

2) The best approach is likely going to be the following: Set up the California LLC and put the property in there. Then file for "foreign business registration" with TN so you are protected in that state.

3) In the scenario above, you are on the hook for both CA and TN LLC franchise taxes and state taxes. An LLC does not pay corporate tax because it is treated as a disregarded entity or partnership for tax purposes so the income flows directly to the members.

Feel free to reach out if you need a more detailed explanation. 

Disclaimer: 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.

@Shan K. The LLC will be the best option for you and your partners. It will allow for maximum flexibly in terms of structure and it will provide you with liability protection. The LLP form of ownership is limited in the State of California to persons licensed to practice in the fields of public accountancy, law, or architecture.

A C Corp is not necessary in a rental situation and has a corporate tax to pay. I would advise you to use an attorney when establishing an LLC, especially since there are multiple members who are not related. Feel free to reach out if you need any advice or setting up a business entity.

@Allison Escovedo I can help you draft a lease agreement. Feel free to contact me. 

@Chris Sackinger It looks like you want to form a Joint Venture (JV) with your GC, which is essentially a contract for a one-time deal. The JV agreement will lay out the roles and expectations of both parties and will provide guidance if there is an issue. You can both agree to certain terms (how to split profits, scope of work, expectations, etc) and include that in the JV agreement.

It is not a partnership per se, just a one-time deal and then you both go your own way. If you want to do more deals with the GC in the future, then you can set up a partnership agreement or an LLC.

A local attorney would be able to help you draft one and ensure it covers all of the necessary issues. Or if you feel comfortable drafting your own, you can do that as well. Good luck.