All Forum Posts by: Naseer Khan

@Eric Johnson As stated above, the entity will protect your personal assets and if you don't have much to lose, then you can get away with no entity to start out. However, if you do have something to lose or if you are risk averse, then an S Corp will likely be the best way to go for a flipping business because you will be earning active income and the S Corp allows you to reduce tax consequences from active income.   

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.

@Justin R. I hate to post a response that merely states to talk to an attorney, but in your situation, I think it would be a very good idea to talk to an attorney before you do anything. 

Not sure what type of agreement you may have with this gentleman but some questions that come to mind are: 

what is your ownership percentage in this project and is that reflected in any contract? 

Are you merely funding the project? if so, what are the duties and responsibilities of the other party?

How will you split any profits/cash flow after completion? 

There are so many more items that need to be addressed (all in writing and signed by both parties) before any work gets underway. If you have a lot of money on the line, be sure to have your own attorney review any agreement. 

@Melanie P. There are companies in each state that will act as your registered agent for a small fee. These companies will accept service on your behalf and then notify you if you are served with any notices. You can google something like "llc service agent in Arizona" and I'm sure something will come up. Good Luck

Side note: LLCs do offer protection. That is why States offer them to businesses - to protect business owners' assets from the business debts/lawsuits. Insurance will cover the costs for a lawsuit and judgments but it will not insulate your personal assets from the business debts. One isn't better than the other, they work in different ways and offer different kinds of protection. 

@Matt A. you're welcome. Yes, you can contact me via the website contact form. 

I agree with @Arpan Patel - Why not do both when both offer different kinds of protection. A savvy lawyer can try to penetrate the entity (which would be very expensive and time consuming for his client) but if you are running your entity like a true business, then you should be protected. Why else would States allow for businesses to establish entities if they didn't actually provide liability protection against the owner.  

Welcome

@Matt A. and thank you

@Chris Mason 

Glad to see that your first year of investing was so successful. Investing out of state is really popular with the Bay Area investors. Regarding entities, here is something to consider:

As a California resident, you will still be subject to the California LLC franchise tax, even if your rental properties are located outside California due to CA's far reaching business rules. For example, Nick is a California resident and a member of a Nevada LLC. The Nevada LLC owns property in Nevada. The LLC hires a Nevada management company to collect rents and provide maintenance. Nick has the right to hire and fire the management company. He occasionally has telephone discussions from California with the management company in Nevada regarding the property. He is ultimately responsible for the property and oversees the management company. Nick is considered to be conducting business in California on behalf of the Nevada LLC. Hence, the LLC must file FTB Form 568 and pay the franchise tax. (FTB 3556 LLC MEO (REV 01-2015).)

Accordingly, you can open a Nevada LLC but you will still have to register as a foreign business LLC in California because you are considered to be conducting business in California, merely by you having some management control of the property and being a CA resident. On the same token, if you setup a California LLC and you decide to transfer your Nevada property to the CA LLC, you will have to file as a foreign registered business in Nevada and pay the same fees as other Nevada LLCs because you are conducting business in Nevada.

Either way, you are subject to the CA LLC franchise tax, There are ways to structure this that is still favorable to your situation, especially considering Nevada's low fees and its allowance of series LLCs. This may sound biased but I recommend talking to an attorney before setting up an entry and having an attorney set it up because it is very useful to have someone knowledgeable on the subject to talk to and do it right the first time. Let me know if you need additional help.

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.

@Michael Marston Generally the common law requires any contract regarding real estate to be in writing - this is known as the statute of frauds. Not sure about your state but it's likely this rule applies. Check with an attorney. 

@Gurjeet Brar I haven't researched every state but the majority require you to register as a foreign entity if you conduct business in that state. Generally, owning investment property where you collect rent is considered "conducting business."  Just owning property is not conducting business. 

And don't forget, if you open an out of state LLC, you will also have to register as a foreign business in California because the FTB considers a California resident who makes management decisions for out of state investments as conducting business in California.

This response is not legal advice and does not create a client relationship. You should seek counsel for your specific situation. 

@Manolo D. The trust itself is not recorded with the county, the name of the trust is recorded, such as: "John Smith, Trustee of the 123 Main st. trust." 

Your entity does have a name associated with it online with the SOS but it does not have to be your name. The name is for the registered agent of the company, which can be any person that has an actual address in the state. Hence, it can be someone you know, your attorney, or even a registered agent company who charges a fee to be your agent. 

So, if you structure the land trust where you are not the trustee and if you structure your entity where you are not the registered agent. then your name is not on record. 

Regarding lawsuits: if you are getting sued for a rental property, then it is likely a personal injury suit and those lawyers work on contingency. The attorney will front money for investigation if they see the case has merit and the injury is serious enough to warrant a good judgment/settlement. So, it all depends on how serious of a case you would have on your hands. 

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.

in some states, Single member LLCs (SMLLC) do not provide as much protection as Multi member LLCs (MMLLC) when it comes to a judgment creditor trying to obtain ownership interest an in LLCs owned by the debtor. I believe every state allows a judgment creditor to obtain a "charging order" from the court that forces the LLC to pay all LLC distributions to the creditor (but does not allow management powers). Thus, one could try to avoid paying the creditor by not distributing anything from the LLC, but then the money would be stuck inside the LLC. In some states, the creditor can then try to foreclose on the LLC interest but that requires the creditor to show the court that the debtor cannot pay in a reasonable amount of time.

The reason people say that it's always better to have more than one member in an LLC is that the charging order remedy for creditors (mentioned above) is designed to protect other members of the LLC from having their ownership interest at risk by an outside party. So, if there's only one member, then it is possible for a court to bypass the charging order and allow the creditor to foreclose on the LLC interest. In California however, the the state and the courts have not explicitly made this distinction between SMLLCs and MMLLCs when it comes to liability protection. Some business friendly states like Nevada have explicitly stated that SMLLCs have the same protection as MMLLCs. Accordingly, it is better to have a MMLLC for that reason BUT if a SMLLC is following the LLC rules and keeping business separate from personal, then the courts should not make a distinction to the fact that it is a SMLLC. Why would the state allow for a SMLLC if they would not afford it the same protections of other LLCs? And as a side note, if your other members of the LLC are Uncle Bob and Cousin Vinny, who have no actual membership rights, then the courts will see right through that and likely disregard those members.

Moreover, I doubt that setting up a land trust with the LLC as the beneficiary will allow one to bypass CA franchise tax or filing as a foreign business in other states. Although it does add that extra level of anonymity, the beneficial owner of the trust is the LLC and the owner of the LLC is the you. One could avoid the FTB for quite some time with this structure but when the FTB finds out that you have business income coming from an out of state LLC, then they will likely impose the California franchise tax on you. It's just a matter of if and/or when they find out -- and at that time the taxpayer may be subject to fines and back payments.

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.