Posted by SpyBoy on November 17, 2005 at 15:23:42:
John,
Would’nt the “doing business” come into play, not by “merely owning” (the ownership itself) the property, but by the specific transaction of conveying it (selling it), as a corporate entity?
The corporate entity is engaged in a business transaction in that state.
Of course, it may be possible to have the actual closing “transaction” occur in another state.
I would think that if all of the parties were not physically in the state when the transaction occurrred, it would be difficult (legally) to make a case of transacting business within the state. The “doing business” statutes/requirements are territorial, land based, venue, location.
I’m not sure about the legal details of transacting a real estate transaction whereby a property located in one state is sold/bought in another state. Any comments welcomed.
Here is the kicker; the act of recording records in the clerks/recorders office, in a corporate capacity, is “doing business”, at least according to the Oregon and Nevada state agencies and legislatures.
I am interested in creating a Series LLC to own several properties, each property insulated from the others in a separate series. There are several different investors, invested differently in different properties. And the properties are in several different states - Utah, New Jersey, Boston. From my understanding this will work, but for liability protection, the state in which the properties are located may not recognize the series nature of the LLC and insulate that property’s liabilities from the other assets in the LLC. Any validity then to use of this sort of structure? And what states offer or recognize series LLC’s?
Series LLC’s are great vehicles for isolating assets. The issue, as you pointed out, is whether the individual states will recognize them. I believe that CA does as their corporate law is very friendly to foreign corporation laws. I’m not sure about the other states you mentioned.
You can probably “hold” property in any state without an issue, but if it is income property and you collect rent, then you will be “doing business” and that is where the issue lies.
You can own properties in different states with a single LLC. and that LLC can have what I will call “partnerships within the partnership” whereby different investors have different interests in different properties. This makes for challenging accounting allocations, but a smart CPA can handle it.
BUT. Your LLC must be registered to do business in each state where you own a property, even if you are buying it and quickly reselling it. Failing to register can get you in trouble several ways. For one, most title companies will require proof of good standing before issuing a title policy to an entity. Secondly, an unregistered LLC will be treated like a General partnership for purposes of liability. This can expose all of your members to liability arising from that property.
If the amount of investment property is significant, you should consider establishing separate entities, thereby isolating the exposure to liability.
Re: Series LLC doing business in other states - Posted by John Merchant
Posted by John Merchant on October 09, 2005 at 18:16:55:
I don’t know what you mean by “series” LLC, but I’d recommend a new LLC for each property with its different investors.
I sure would not want any confusion with different LLCs with separate investors and I think you don’t want that either.
By the way “doing business” in world of corporations and LLCs is “term of art” with specific tested legal meaning…and mere buying and selling RE in a state does not normally constitute “DB” there…but owning and renting in a state DOES constitute DB requiring registered agent for service in that state.
I know that we can do what you’re describing, but in addition to simplifying and moving us all under one umbrella LLC so we can share other expenses (such as… we sometimes furnish to show the house better and offer the furnishings package for purchase. If they don’t want the package, it would be nice for the Umbrella LLC to own it and shift it around to properties and rent it to that property), we want to be able to insulate the liability of one property from another - which the method you’re describing does not do. If one property runs into trouble, we don’t want its creditors coming after other innocent properties in the same LLC. The Series LLC does that -where series legislation is recognized. You’re right about being recognized in every state property is owned in however.
From my experience, states are intentionally vague about defining “doing business”, because they want to bring in as much tax revenue as they can from non-residents (they can’t vote). I would be surprised if any state would willfully not look to tax the gains on the sale of property located within their state. Unless of course they do not have an income tax.
John K Haslach, CPA, MST
Posted by John Merchant on October 11, 2005 at 14:21:39:
While John H is right, in theory, that every state would grab as much of us as possible, under any possible theory, we need to look at who’s making this law and defining the DB issue.
It’s lots and lots of court decisions, from every state, over lots of years that has made the DB law as it is.
For whatever reason the legislatures have pretty much left this alone, and there’s not a huge proliferation of state legislation requiring the out-of-state corp to register in every other state…maybe because it’s really in NY’s best interest to require the registration of the CA corp who’s selling PCs in NY, because then the big NY corp (e.g. Eastman Kodak) would be having to pay to register in every other state.
But there’ve been a large number of court decisions defining what is/is not DB in every state…and the predominant law from these accumulated court decisions is that the mere buying & flipping RE in a state is NOT DB.
Operating a rental business, yes, but mere acquiring then selling, no.
FYI, I reference CT Corporations little book, published now for lots of years for lawyers on this precise topic: “What Constitutes Doing Business”.
Available, so far as I know, only from CT Corp’s NY office.
John, realized we may be speaking about different things. When I think about “doing business”, I think about whether they are subject to the state’s tax. “Doing business” from your point of view may mean whether they are required to register with the state.
Thanks, John. I do not have the law available, but, if you take a look at the Connnecticut instructions for nonresidents (CT-1040 NR/PY), on page 8, CT source income for a nonresident includes income “Attributable to ownership or disposition of real or tangible personal property within CT, including but not limited to, income from the rental or sale of such property.”
Even if done through a partnership/LLC, I believe CT’s view is that any gain from the sale of real estate in CT would be subject to CT tax.
So, it may not be “doing business”, but CT still feels it is subject to their income tax.
In every state with which I am familiar, an out of state corp , LLC, LP or LLP must register to do business if it owns real property situated in that state. That includes California and Texas.
Worse, if a Delaware LP owns property in Cal, and does not register, some nasty consequences can lay in wait. If some kind of claim arose from the California property (premises liability, for example), the Delaware LP would be treated as a general partnership for purposes of California law. and thereby expose all of the limited partners as if they were general partners. If the nonregistered owner is a corporation, I am not sure how this issue plays out. This may expose the officers and directors to liability. I’m not sure about the shareholders.
Posted by John Merchant on October 12, 2005 at 09:51:12:
We may be discussing different things here.
Is a foreign corp that merely owns RE in CA, TX, DE really required to register and appoint an Agent for Service, or are we talking about different things?
According to CT Corp’s manual on “Doing Business” (2003),The Revised Model Act, adopted by majority of states in 1984 specifically excludes “mere owning, without more, real or personal property” from having to register in each state where that property is “merely owned”.
But if you have court or statutory citations showing CA, TX, etc. now DO require the out of state corp that merely owns RE in those states to appoint in-state agents for service and register, please post them so all can see and heed them.