A common question for many real estate investors is where I should set up my LLC or corporation. Unfortunately, there is not an easy answer because, like all planning, it will depend on several factors. Here are two primary factors that should aid many investors in answering this question.
Where you plan to invest
Let’s say that you live in Washington state, but you’re going to be investing in single-family rentals in Oklahoma. Should you establish one or more Washington LLCs, Nevada LLCs, or should they be in Oklahoma? For most investors, the correct answer will be Oklahoma because that is where the rental property is located. The state of entity formation is relevant because states consider the renting of property to be conducting regular and continuous business activity in the state.
Failure to register your LLC in the state where the rental property is located can have serious ramifications. For example, if the investor decided to use Nevada or Washington LLCs to hold their Oklahoma rental real estate, no state agency would object until the investor seeks to evict a tenant or enforce an agreement with a contractor. A savvy attorney will request dismissal of the case on grounds the Nevada or Washington LLC is not registered to conduct business in Oklahoma, and therefore, cannot bring legal action. The only solution for the Nevada or Washington LLC is to file in Oklahoma as a foreign LLC. Thus, the investor will end up paying two state filing fees and costs.
Investing activity
Different types of investing activities can also drive the decision on where to file. If an investor is planning to fix and flip real estate in different states, then a good structure dictates using a corporation for tax purposes and LLCs to minimize risk. For example, if a Florida investor has a Florida corporation but intends to flip property in Georgia, Tennessee, and Indiana, the investor could create LLCs in each of these states to hold the flip property or consider setting up separate Wyoming LLCs for each of the flip transactions. The benefit of using Wyoming is the cost (low filing fees) and anonymity (no one can search and discover who owns the LLC). The second factor might be the most important to an investor, given how aggressive attorneys become with the shakedown lawsuits brought on behalf of a disgruntled buyer. In contrast to the point raised in #1, when flipping with a Wyoming LLC, the company will not need to register in any of the states because it is engaging in an isolated transaction (one flip).
Creating a structure for real estate investing is not a one-size-fits-all approach. Other considerations, such as entity taxation, must also be taken into account when deciding on where to set up your business entity.
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