Where Should Real Estate Investors Should Create Their LLC?
Real Estate investors routinely form limited liability companies to hold assets. Owning real estate often requires registration in the state where the investment property is located, but investors are often lured by "business friendly" locations to take advantage of what they perceive are tax benefits and maintaining anonymity.
Here are some basic considerations when deciding where to form your entity:
Registration in Your Home State
Registration in your home state has distinct benefits. You will likely have access to local counsel familiar with state laws and who can update and help you operate and update your entity documents. It may make opening a bank account easier and, if your property is located there, it is the obvious choice in terms of convenience.
Registration in Another State
Other jurisdictions like Nevada, Wyoming, and South Dakota have gained popularity for various reasons, such as business friendly state statutes or the availability of complex asset protection trusts. However, the benefits of selecting one of these out-of-state jurisdictions does not always outweigh the costs and inconveniences. Certain tax benefits may only apply to residents of a specific state, and some protective measures - and related administrative costs - may be excessive in relation to the value of your investments. Moreover, many of these jurisdictions lack an established body of corporate case law, which is a significant drawback. One notable exception is Delaware, which offers well-established protective measures, privacy for LLCs, and a sophisticated corporations statute. Further, because it is so well established, investors across the United States are most familiar with Delaware law and its rules governing limited liability companies, corporations, and governing boards. Ultimately, the choice of jurisdiction should be based on your individual circumstances.
Foreign Registration
If your property is located in another state, you will very likely need to register as a "foreign LLC" in that jurisdiction. This is usually not complicated and can be done with a simple filing.
Piercing The Corporate Veil
One important consideration is how that laws of a state treat "piercing the corporate veil" which happens when a business owner becomes personally liable for their business' interests - specifically as related to single-member LLCs. While most states provide liability protections for multi-member LLCs, single-member LLCs may not have the same level of protection in other states. A similar and related concept is the availability of charging orders, which gives an LLC creditor the right to receive an individual's share of economic distributions from their LLC to satisfy the debt.
Selecting the appropriate jurisdiction to establish your LLC or corporation is vital for the future of your business. Each option, whether in your home state or elsewhere, comes with its own considerations. Please contact our firm if you would like to discuss how we can help ensure that your real estate entities are set up correctly and in the most efficient manner from the very beginning.