Nevada LLC??

[grommitt]

I'm new to this forum and I want to get started in REI, but I want to have the right asset protection.  I plan on buying some properties for rentals, and maybe also buying some rehab properties to fix up and resell.

I want to protect myself, so I was planning on setting up my own LLC.  My investments might be in a couple of different states, so I was thinking about setting up a Nevada LLC.  Any pros / cons with a Nevada LLC?  Should I just do an LLC in my home state?  Any advice would be appreciated.

[WilsonTaylor]

Grommitt,

In Texas, a non-Texas corporation doing business in Texas has to pay a foreign corporation tax that is about equal to the franchise tax that the corporation pays.  It would also have to pay franchise taxes in its own state, so the money would be taxed twice.  I would recommend that you check with the laws of your state to see if there is a similar law for you to contend with.

Wilson

[grommitt]

I'm assuming that based on your reply, even though an LLC is not a corporation, in Texas an out of state LLC falls under the category of 'non-Texas corporation' and is subject to the foreign corporation tax.

I live in California and I was looking at buying a couple of properties in Utah, Nevada, and Arizona.  So it sounds like I might have to set up a different LLC in each state that I purchase properties.  Any other thoughts on this?  Anyone ever done this before?  Sounds like a tax filing headache!!

[WilsonTaylor]

I noticed after I had posted the reply that you had asked about a LLC and I had replied about a corporation.    Texas does treat corporations, LLC's, and LP's the same as far as franchise tax.  Tax accounting for properties should be separated by property anyway, so it shouldn't matter much how many entities you have.  I don't enjoy accounting, but I sure don't like to pay taxes either.

Wilson

[grommitt]

Thanks Wilson for your reply.  The ironic thing about all of this is I'm actually a CPA, but taxes are not my area of expertise.  I just learned enough to pass the CPA exam 6 years ago and haven't really kept up with it.  I work on the corporate side of accounting dealing with financial reports and SEC rules and regulations.  It's actually embarassing how much I don't know about setting up my own company.  All of the basics about S-corps, C-corps, LLC's, LLP's, etc I know from the CPA exam, but actually setting one up is one step further than what you learn from college classes and studying for an exam!!

I was hoping to only need to set up one LLC, and it looked like Nevada was the most favorable place to set one up if I was buying properties in multiple states, but I'm still not 100% sure.  I'm also trying to figure out if I should set up a single person LLC (I know it will be disregarded for Fed tax purposes and flow through on my Sch C), or a two person LLC with my wife as the other partner.  It just seems odd that I would file a partnership return (1065) and then receive both K-1's that will flow through on my joint tax return.  Any pros / cons to single person vs two-person LLC??

[WilsonTaylor]

I can't help you with that one.  I have never been the only member  of a single member LLC.  I would suggest that you talk to a Tax specialist to see what the advantages/disadvantages might be.  If you don't know of one, send me a PM and I can either do some research for you or give you the name and # of my accountant/tax attorney.  

Also, you mentioned not having thought about setting up more than 1 LLC.  The information that I have seen recommends that you not have more than $250k in equity or $500k in total value in a LLC or LP for asset protection.  When they get that much in them, it makes it more likely that someone who wants to sue you will find your LLC too delicious to resist.

Wilson

[grommitt]

Thanks for the help.  I'll look into the single member LLC some more.  I guess I won't worry about setting up multiple LLC's until I buy more than one property.  I still need to make my first purchase before I have to worry about that!!  Just trying to figure this stuff out before I get in over my head!

Grommitt

[John Hyre]

Good answers from Wilson on NV entities.  For RE in general, they cost far more than justified by their true (as opposed to purported) benefits.  Selecting an entity in the state where you are doing business is generally the way to go.

In re LLC filing as partnership or disregarded entity:

In husband/wife situations, the IRS allows those living in community property states (like TX & CA) to choose which way to file.  While the IRS technically requires husband/wife in non-community property states to file as a partnership, as a practical matter, if they file as a "disregarded entity" instead, penalties are very unlikely.  In short, I have advised clients in all states who are husband & wife to file as disregarded entities if the LLC is not going to elect corporate status.  Why?

Filing as a partnership takes more time and costs more money.  The partnership return is more complicated, easier to foul up and requires that more information be given to the IRS (e.g. - balance sheet).  As such, a husband/wife LLC is generally better off filing on Schedule E (rentals) or Schedule C (flips) of Form 1040.

John Hyre

[grommitt]

Thanks John.  So it sounds like I should set up the LLC in the state that I am purchasing my property(ies).

With regards to the single member vs two-member LLC, it sounds like the two-member LLC (husband & wife) can be disregarded by the IRS in community property states (or overlooked by the IRS in other states) and would simplify tax reporting.

One final question.  Do I loose any major deductions by filing on Schedule E (rentals) or Schedule C (flips) of Form 1040 instead of a partnership return?

[John Hyre]

No.  LLC's disregarded by the IRS are perfectly tax-neutral.  LLC's treated as partnerships are 99% tax neutral.

John Hyre