Buying residential property with an LLC - Posted by Steve

Posted by Jimmy on June 06, 2007 at 07:35:51:

its really simple. if an out-of-state entity wants to do biz in another state, it must register with the Secretary of State and get “qualified” TDB.

this makes a ton of sense.

from a public policy standpoint, the State of X has a right to know who is doing business in its state. and an obligation to make sure foreigh entities are subject to the sames rules and regulations as domestic entities. If my TX entity has to pay franchise taxes, file infomation reports and comply with local law, then so should a foreign entity doing biz in State X. Otherwise, the foreign entity has an unfair competitive advantage. and why should a unregistered foreign entity have the privilege of using the court system in State X?

your comparison with individuals misses the mark. individuals do not have to “register” when entering a new state. an individual is a naturally-occurring legal entity, and are free to flow across borders. but not entities. Entities are creatures of law. And as creatures of law, they must comply with the law.

Buying residential property with an LLC - Posted by Steve

Posted by Steve on May 30, 2007 at 11:13:14:

I am looking at a residential property to purchase out-of-state as an investment, and had some questions regarding asset protection I hope someone can answer for me.

  1. When signing documents (including the Contract to Purchase Real Estate), what would be the proper way to sign the documents (e.g., John Doe, Manager, My Company Name, LLC)?

  2. I got the okay from a local bank to buy the property with an LLC using a personal guarantee (PF) for the loan. What about insurance? Should I get the normal landlord policy or should I also get an umbrella policy to protect my LLC? And, since I will be getting a PG, is there any “gotchas” I need to consider with insurance?

  3. Since the property I will be buying is out-of-state, is it best to create the LLC in my current state or in the state the property is located?

  4. Are there any other things I need to concern myself with going this route?

where to create LLC - Posted by Jimmy

Posted by Jimmy on June 04, 2007 at 06:30:13:

you mention that you are acquiring a residential property. if this will be rental, you will be “doing business” in that state. as such, you will have to register your llc and “qualify it to do business.” this means you will have filing requirements in the state of organization, as well as the state where the rental is located. so creating an LLC in that state will avoid paying franchise taxes (or business license taxes–or other charges and fees) to multiple states.

if this is your first deal in this state, and you are not sure if you will do additional transactions, I would advise you NOT to create the LLC now. don’t complicate your life until there is a really good reason to do so. you can always create the LLC later, and then transfer your properties into it. the bank won’t care, so long as you (and spouse) are the only members of the LLC.

Re: Buying residential property with an LLC - Posted by Rich-CA

Posted by Rich-CA on June 01, 2007 at 13:42:48:

Once you have the property in the LLC, you will need to carry insurance in the LLC to cover it as well as anyone you have do work on the property (such as a property manager or tradesman). You will need a Landlord policy (for example, mine includes tenant vandalism and lost rents) as well as a liability coverage. If you have multiple properties, investigate coverage that allows multiple properties on a single policy, as this allows you to aggregate liability coverage and set a higher level while also reducing costs.

You need the LLC liability coverage because any excess judgment in a lawsuit passes through to you but your personal liability will not cover it.

For where to create the LLC. If the LLC will only own property but not actually do business, the state does not matter as much. If you do business, compare the cost of registering a foreign entity vs creating on in state. For example, in TX and AZ I found the cost higher to use an out of state LLC than one registered there.

Make sure you have enough liability coverage on both the business and yourself (because you can lose ownership if you are sued and lose because a company you own is an asset on the table). The coverage should be high enough to cover your assets (many judges will consider your total net worth all anyone can take from you and if your coverage is that high, then you’re home free). The coverage should also make the insurance company fight to not lose, rather than paying off the plaintiff and dumping you.

Re: where to create LLC - Posted by Natalie-VA

Posted by Natalie-VA on June 05, 2007 at 13:20:24:

Jimmy,

Isn’t this state specific? My impression is that many states don’t consider owning rental property to be “doing business”.

–Natalie

LLC “doing business” in State B - Posted by John Merchant

Posted by John Merchant on June 05, 2007 at 16:08:52:

Mere ownership of a real property isn’t the issue.

If the out of state LLC is operating a rental,THAT is considered DB by most or all states and as such would require the local state registration of an OOS LLC.

Failure to register in State B could really hurt the LLC as it would then lose its right to represent itself in court in State B, either as a plaintiff or defendant…and as such, it would then be a sitting duck for a big liability action, etc. as it couldn’t go into court and defend itself.

Re: LLC “doing business” in State B - Posted by Natalie-VA

Posted by Natalie-VA on June 06, 2007 at 07:04:11:

That’s very interesting, John. Sometimes the law doesn’t makes sense to me. Then again, maybe it’s the way I think.

If I’m understanding you correctly, you’re saying an entity can’t defend itself in court unless it’s registered in that state. Now let’s take that to a personal level. If I were sued in another state, could I not defend myself without being a resident of that state?

I know it’s off topic and perhaps illogical. These are the things that go through my head sometimes.

–Natalie