I live in CA, have rental properties in CA, FL and NC. I am trying to assess where I should setup my LLC so I have maximum liability protection and tax advantage. Any advice? Any law firm that you feel is good at this?
I’m not a lawyer, so take this for what it’s worth. I have started many LLCs as well as multiple C-corps, an S-corp, several sole proprietorships and had and have DBAs.
If you’re liable for a problem and you’re not formed as an entity, insurance may help but the statistics say they rarely pay out, leaving you personally liable. To avoid personal liability you need to be organized as an entity - LLC or corporation, whichever is right for you. There is no one-size-fits-all answer and ignore every expert (there are several who are very visible) who tells you how you need to be organized after a 15 minute consultation.
For trustworthy advice I’ve found that KKOS lawyers (Mark Kohler, website by the same name without the space and with .com) are the best. Read “Lawyers are Liars” and “Tax and Legal Playbook” (two of Kohler’s books) before you think of hiring anyone to help. What he will tell you is if you are not registered to do business in the state where you own property, you have no LLC protection for that property no matter what name is on the deed. He advocates registering your business in an entity - not a sole proprietorship and not a DBA - where you live and either setting up additional LLCs in the states where you do business or registering as a foreign corporation there.
When you talk to two of the big-name, real estate focused law firms that are very visible in some forums and on Youtube, both will have free consultations. They will give you a special offer only good for while you’re on the phone or webinar. Run away. You don’t have to spend thousands to do this. I’ve wasted way too much time trying to piece together all the free advice over the years. I finally just hired a lawyer who specializes in this to do it.
-Laurie
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@inventivebuyer How much equity and net worth do you have to protect? That is a good question to start with. An LLC separates risk for properties vested in that LLC from your personal financial picture and your other assets. If there is a problem not covered by insurance, all the assets and equity in property vested in the LLC is at risk for a judgment creditor.
If you have ample equity in your home or other personal assets but not much in the rentals, one LLC for the rentals may be enough. If you have ample equity in rentals in each state, separate LLC’s for each state may make sense. If you have ample equity in single larger properties, single asset entities, a separate LLC for each, may make sense. How much is ample? Equity of $100,000? A million? 25% of your net worth? Balance the cost, effort and complexity against the potential risk. Then you make the call.
You want to isolate the risk into the LLC and protect other equity or assets outside the LLC, maybe in another LLC. The LLC can take a hit, that may wipe it out. That would hurt, but it should not be devastating. Not as bad as losing everything.
We had a retail business, in an LLC, that went belly up in 2010. It was a total loss, a big loss, six figures. That is enough zeros to really hurt. But the risk was isolated in that business LLC, so we did not lose our rental properties or our house or our cars or any toys. We did lose the cash we had to pay lawyers and that was also painful. Always best to avoid problems and losses! Yeah right.
We hold our major equity rental assets and our operating real estate business in separate LLC’s. We vest each flip or development project in a separate Title Holding Trust with the business LLC as the trust beneficiary. When a project is complete the property or sale proceeds are distributed. Then the trust is killed. The business LLC does not hold many assets. So that LLC has high risk and little equity. Each rental LLC operating company has ample equity but good insurance, strong triple net tenants and strong commercial leases that reduce our risk and further protect our equity.
We are also in California so each LLC costs us $800 a year plus CPA tax prep. Say $2000 to $3000 each. If we sell a property that franchise tax goes up another $1000 or so. They are treated as Partnerships for the IRS, so any net income flows through to us as Member owners. Other states may be cheaper but check with your CPA. California has a long arm for tax collecting and they may require you to file a foreign LLC tax return in California anyway. It was the Golden State until the government started taking lots of the gold.
I am not a lawyer or an expert. I am not offering advice. I am just relating experiences from the school of hard knocks and sharing how our business is structured. Hope that helps. Sean
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@inventivebuyer Sorry if this has already been covered, and I’m not a lawyer, but Clint Coons at Anderson Consultants has produced some good info on this subject. Check out his YouTube channel. (FYI, this isn’t an endorsement and I don’t benefit from this recommendation.) However, and to Laurie’s point, I agree that you should avoid the “free consultation” Anderson or other firms may offer, as firms like theirs are pricey and have robust sales departments. Instead, just get some basic free info from videos and reading, then find a reputable local RE attorney to set you up the right way.
@sean-markey , Thanks so much for the elaborate answer. Much appreciated
@inventivebuyer Lots of great answers and knowledge already given.
I run a trucking company and have hired and setup shop in multiple states. I had to register in each state as a foreign entity. I use my same LLC and business name and it doesn’t interfere with other business names in that state as long as I’m registered as a foreign entity. You would set that up in each state on the same website that state uses to apply for articles.
The only issue I ever had arise, was hiring local employees. That state will have their own work comp requirements. Some states like Wyoming has a state run work comp and requires a bond payment which can get costly.
It is also required to have a foreign entity in some states for banking. If I didn’t have a brick and mortar then I needed to prove I was registered in their state. Any large banks that’s not a concern. If you have staff that needs banking access and your bank isn’t there you may need to provide that info to open an account
Where there is no counsel,
the people fail;
But in the multitude of counselors there is safety.
-Proverbs 11:14
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@laurie , thanks for the details.
I keep hearing that LLC can give you anonymity and they (those who want to sue you )cannot find who you are and therefore cannot sue you. This does not seem to make sense to me in this day and age. They can always find out who owns the LLC. There are services and google search that can give this information. My question is: can LLCs be setup such that , people can find who you are, but they cannot come after your assets outside of the LLC. Is that the real protection LLC offers and not protection due to so called anonymity?