Today’s REI Classroom Lesson
Today, Clint Coons talks to us about different strategies for setting up your legal entity, including when to set it up in the same state that you’re investing in and when it makes sense to establish your legal entity in another state.
REI Classroom Summary
With all states having different laws and fees, it’s good to get expert advice from a tax advisor who understands real estate investing so that you’re making the best business decision when setting up your legal entities.
Listen to this REI Classroom Lesson
Real Estate Investing Classroom Show Transcripts:
Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Clint: Hi, Clint Coons here with Anderson Business Advisors and host of the REI Classroom show. Now, in this segment, we’re going to be covering where to establish your limited liability company.
Mike: This show was sponsored by passiverental.com.
Clint: I get this question a lot from real estate investors, “Where do I set up an LLC? I’ve heard a lot about Nevada, Wyoming, Delaware. Where should I set it up, Clint?” Well, it depends. And that’s a typical lawyer answer, of course. But it really comes down to what you intend to do with that company. If your LLC is going to be set up to flip real estate, then, obviously, you need to consider creating that company in the state where you’re going to be flipping property.
For example, let’s assume that I’m a California resident and I intend to flip property in California. There are some advantages to having a Nevada or Wyoming corporation for flipping. But if you’re residing in California and you’re flipping in California, what would happen if you set up a Nevada LLC or a Nevada corporation? Well, you’re going to have to file in Nevada, pay Nevada’s fees. Then you need to go over into California and pay California’s fees because you have to register as a foreign entity doing business in California. So, essentially, what occurs is you end up paying two state fees for that one entity.
Now, many investors have gone about this the maverick approach. That is “Well, I’m just going to set it up in Nevada or Wyoming. And I’m not going to register it. I’m going to continue to do business in the state in which I live.” Now, you can get away with that for a while. But the first time someone stiffs you on an agreement or you have to evict the tenant, that’s when you’re going to find out you have problems because you’re not going to be able to bring an action. That is, if somebody didn’t pay you or they didn’t perform, you couldn’t sue them because your entity isn’t registered to do business in the state where you’re conducting business.
So for real estate investors, I often recommend the following. If you’re flipping property, create the corporation or the LLC where you intend to do the flips. Now, if you think you’re going to be flipping in multiple states, well, then it might make sense for you to create an entity in Nevada or Wyoming or Delaware that has no tax or low tax on their business entity. So then you can apportion income appropriately. Not everything is going to be taxed back to the home state where you’re doing some of your business. So you really have to decide there and work with a tax advisor and determine which is the best course of action. But if you’re strictly limited to one state or the majority of your activity is taking place in that one state, that’s where you should create your entity.
Now, when it comes to buy and hold, same thing, I look at where the property is located. And that’s where I would recommend you create your LLC. Now, in certain circumstances, you’re going to run against states that have very high annual fees, such as Massachusetts or California, where, depending on the state, it’s either $700 or $900 a year to keep that LLC alive. Now, if you have multiple properties in that state, just think, 10 properties, that’s $7,000 a year because each property is going to have its own LLC. That can get real expensive.
So in those situations, what we might consider is utilizing a jurisdiction such as Wyoming where it’s only $50 a year, create an LLC for each property in Wyoming, but then have our, say, Massachusetts property owned by a land trust. And then that land trust [inaudible 00:03:41] Wyoming limited liability company in order to keep our cost down. Now, if we’re just setting the LLCs up in, say, Florida, because we own property in Florida, then, of course, because of the low annual fee down there, I would create my LLCs in Florida.
So you kind of have to look at the annual fees that are associated with the LLCs. And, also, you want to look at asset protection that comes with it because not all states are created equal. Many times, I recommend that before someone goes about creating LLCs in certain states where they plan to buy property to hold, I would suggest they start with a holding LLC in either Nevada or Wyoming and then grow from there.
For instance, let’s assume I started with the Nevada holding LLC, and then I wanted to create three LLCs in Florida. If you set it up right, you can ensure that those three LLCs you create in Florida point back to your Wyoming LLC and no one will know that you’re associated with those three Florida LLCs because the anonymity that Wyoming provides can extend into Florida. So a lot of this is about understanding the nature of each state’s laws and how to put together a plan that will protect your assets and create an anonymity shield around them. My name is Clint Coons with Anderson Business Advisors.
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