I am having a bit of a dilemma trying to figure out the best way to establish an LLC. @retipsterseth has a lot of valuable information on the subject, yet, I still am unsure of what to do.
My current situation: I am planning to move to another state as soon as December or January. I currently have two properties (vacant land) in closing and I want to have an LLC before I list the properties for viewing. It seems that I can create and LLC in my current state and, when I move, register my LLC in the new state as a foreign LLC. This seems like a good option but also appears subject to higher taxes. On the other hand, I have the option of creating an LLC in my current state and then dissolving that LLC when I create the new one in the new state. Additionally, it seems that i could merge the old LLC into a new one in the new state (although I am unsure of the legalities and taxes for this option).
A final option is to wait to sell the properties until I move and have started an LLC in my new state. Two reasons I don't want to wait is 1) because that is valuable time these properties could be on the market and 2) one owner has told me that they have issues with neighbors coming onto the land before.
What are your thoughts/suggestions on which route to take? Any input would be greatly appreciated.
@kayarbe, I will point out first, and most importantly, that I don't really know what I'm talking about on this subject. :-) But I'm just sort of thinking out loud, here...
As long as the state where you ultimately set up residence is getting their fair share of state income tax (assuming there is state income tax) from the earnings you generate through your LLC's business dealings, I wonder if there would really be a problem in keeping the LLC registered in the first state where you're living now, after you moved? Are the properties that you mostly anticipate flipping located in the new state? If not, is there anything to establish that you're really "based" in that state other than the fact that you happen to work remotely from there (hence paying any applicable state income tax)? Assuming you did need to get the LLC somehow registered in the state where you'll be living, of the options you mentioned above I'd personally be most inclined to look into organizing the LLC in the state you're living now (since you are ready to start doing business under the LLC now, and it sounds like the fees might be less expensive, too), and register it as a foreign company in the state you move to if you find that you need to. I don't recall exact numbers, but I know the company I work for at my day job has had to register as a foreign corporation in various states before, and I think on an annual basis it might only cost $100 or so to pay someone to act as your local agent in many places. Then you could always transfer the LLC or close one out & create a new one, after you've already moved and have time to sort this all out. In any event, it seems to me that it would be a shame to delay selling those properties because of this.
One last thing that jumped out at me, though, is you mentioned you already have two lots heading to closing (on the purchase side). Since I already had an LLC created for other endeavors prior to land flipping, I've never bought properties to flip in my own name, transferred them to my LLC, and then sold them to another buyer from my LLC, but I suspect you'd end up paying some duplicate recording fees, at least, doing it this way. For instance, if you quit-claimed the properties from your name to your LLC, that would have to be recorded just like any deed when you buy or sell the properties, as far as I know. Hopefully others with more experience can weigh in.
@dl7573 Thanks for the reply. I think this is some sound advice. To your question, the state where I am closing on the two properties is in neither my current state or the state that I am moving to. Regarding having duplicate recording fees, I thought about that also. I wanted to prove to myself that I could actually land some deals before I set a LLC, website, etc. Now that I have landed a couple deals, I really feel the necessity to set up a LLC prior to letting people onto the property in order to protect myself. So, unfortunately, like you said, I think I will have to pay to transfer these to my LLC as well.
Makes sense, @kayarbe. Other than happening to have an LLC already in place, I was the same way in terms of wanting to prove the concept to myself before I started adding on additional costs Along those lines, I will say, if you're the entrepreneurial/side hustle type, I think there's a decent chance you'll find other handy uses for your LLC whether you stick with land flipping or not. I know I have. :-)
Again, I'm not a lawyer and everyone needs to consider their own risk tolerance and all that, but regarding the two properties you're acquiring right now, the following are a few random thoughts and questions that come to mind, that for me might factor into whether I wanted to incur the cost of duplicate transaction/recording costs for the properties and/or potential additional costs of organizing an LLC in a place that you might not have, otherwise. I only ask these rhetorically, and certainly don't mean for you to feel like I expect you to answer some of these questions to a stranger on the internet :-)
Are there any particular hazards that these properties represent (e.g. a lake of any significant size with a dam that could break, posing a hazard downstream, etc.), or do your concerns come down to people getting injured on the property?
Without knowing all of the facts, it seems that of the concerns I can think of, they would likely come from owning the properties, period, rather than the act of selling them, so they would apply whether you listed the properties for sale right away, or sat on them until you moved.
Assuming you might primarily be worried about someone getting injured on the properties in the time that you own them, do you know if they already have No Trespassing signs posted, or could you get those posted quickly after closing, if that's a concern? If you're not local to the properties, even hiring someone who is to post the signs for you might potentially represent a lower cost than doing a double transfer on the properties before you sell them.
If you're not too far along on your closing(s) yet, can you set up the LLC and assign the contracts to it in time, so that you avoid the double transfer/recording costs?
Do you have a Personal Liability Umbrella Policy (or would you consider getting one)? I'd check with my insurance agent, but as long as you're not selling these initial properties as a business, I would think a PLUP might cover you in the (hopefully unlikely) event that someone got injured. Once you have an LLC, or it's clear that you're doing this as a business, then I would absolutely assume a PLUP wouldn't cover anything that happens on the properties you own for the business.
Absolute worst case, do you currently have substantial assets (including the value of these lots) that might be compelling for someone to want to come after you?
Lastly, if someone wants to pursue you or me badly enough, an LLC alone may or may not ultimately offer the protection we hope it will.
I don't point these things out to be unnecessarily gloomy. Actually, it's the opposite. I find it's helpful to consider the costs, benefits, and relative, probability-adjusted risks of the different options in situations like this, and then decide what's best for your own budget and risk tolerance. And in short, I'm really just saying, what specific risk with these first two properties are you looking for the LLC to mitigate, and is there another way that's as good, or better, to address it?
These are some great points/questions @dl7573. I had not considering a PLUP policy. I will contact my agent Monday and see if this is something that I would be eligible for and is applicable to my current situation. I have seen that some people, especially first starting out, that buy and sell without an LLC. Owning/selling property without some sort of protection makes me a bit nervous though.
Not legal advice here but here is what I would do:
But and resell the two lots in your personal name now. If you already opened title and signed Purchase agreement under your name, then it will be hard to close in an LLC now that you are going to create (you would need to assign the contract to the LLC).
Sell those lots and see how the process is and if it works for you. Why incur more expense and work until you know for sure you want to be in this business?
As to the LLC. You can set up and LLC in any state and run the business remotely. You can also buy and sell vacant land in another state in most cases without needing to register as a foreign company in that state. (Unless you are doing more serious deals/ rental properties/ or ALL your deals there)
Personally I have a WY LLC. It it super cheap, the state has no income tax, and provides privacy protection for who owns the LLC. It has worked fine for my land business. I run another real estate business with rental homes in IL and have an LLC there and lets just say that baby is a LOT more expensive to run.