Good morning!
Can we chat about some more “real life” investing points of confusion this week? I feel like it’s super helpful (at least for me) to type out all the facts and learn from you all as well! Last week it was “where do we find small dollar financing”? This week it’s “should we incorporate our LLC in a foreign state”? I want to start off by acknowledging that LLCs are not the best route for everyone but they are for US (we think!). Working under an LLC enables us, as business owners, to differentiate our personal and business lives, and protect our personal assets. Furthermore, compared to other corporation routes, it helps us avoid the double taxation that an S or C Corp might bring. One thing we are currently considering is the option to form a foreign LLC, aka an LLC in a state DIFFERENT from where we currently invest and operate.
WHY WOULD WE DO THAT? Well, often times I will read advice from “gurus” who argue that filing LLCs in states like Nevada or Delaware is the only way to go, in order to maximize the most benefits. Beyond that, New York, where we currently work, is known for having a “thin” corporate veil, meaning it is easy to lose the protections of the LLC if you do not follow every LLC rule “to the T”. As we work to grow our own portfolio, I wanted to explore this a bit.
So, as we do, let’s talk Real Estate, let’s talk LLCs, Domestic vs Foreign…
THE PROS TO FOREIGN LLCs
…but really only if you are forming your LLC in Nevada or Delaware
Nevada Specific …
- Protection : Nevada law protects directors and officers from personal liability for acts committed on behalf of the corporation or by the corporation (except in cases of fraud) … this seems to be the #1 reason investors choose to file their LLCs in Nevada
- Annual Meetings & Agreements : Does not require operating agreements or annual meetings
- Capital : No minimum capital is required
- Reporting : Minimal Reporting and Disclosure Requirements
- Tax Advantages
- No Taxes on Corporate Shares
- No Franchise Tax or Gift Tax
- No Stock Transfer Tax
- No State Personal Income Tax
- Privacy
- Only officers, directors, and resident agents are disclosed
- Nevada is the only state in the U.S. that does not share information with the Internal Revenue Service
- Stockholders are not a matter of Public Record
- Flexible
- Directors can change bylaws
- Law requires only one director (you can have a corporation with only one person involved (the same is true for Delaware and Wyoming!)
Delaware specific…
- Business Friendly Regulations : Protects owners of a business
- Court of Chancery System : Delaware has the Court of Chancery system, specific to corporate law, where the cases are run by experts, aka judges, instead of juries. This paired with the fact that Delaware has an unusually high number of corporations means the Court of Chancery is well versed in corporate practice.
- Flexibility : In how you structure your corporation
- Some Tax Advantages
- Corporate income taxes : Does not collect corporate income taxes from corporations that do not make money within the state of Delaware
- Does NOT tax Royalty payments or other intangible assets
CONS TO FOREIGN LLCs
- Protection Not Foolproof : Incorporating in another state may not always protect you where you work
- Paperwork : LOTS of paperwork
- Double the Tax Codes : You will have to consistently monitor and manage the tax codes for the states you file in AND the states you operate in
- Additional Fees
- Filing Fees : You will have to pay filing fees for the states you file in AND the states operate in
- Registered Agent Fees : You will have to pay a registered agent fee in order to be able to file with a foreign address
- Annual Report Fees : In the event that a state requires an annual report, you will need to generate one for the state your LLC is filed in AND the state you operate in
- Double Taxation (at times) : Same story here! You may have to pay taxes in both states (depending on where you operate and file)
Nevada specific…
- Becoming increasingly expensive for foreign filers…
- Filing Fees
- Registered Agent Fees
- Foreign Qualification Fees
- Tricky laws
- Privacy is only for owners and shareholders NOT members … deciphering between the two can be tricky
- You can only take advantage of Nevada’s tax perks if the income is derived in Nevada OR the income is derived in another income tax-free state
Delaware specific…
- High cost for foreign filers…
- Filing Fees
- Registered Agent Fees
- Double Franchise Tax
- Foreign Qualification Fees
MY TAKEAWAY?! Honestly, I’m no longer convinced that foreign filing truly benefits small businesses… aka myself, at least not yet. It might really only make sense to consider foreign filing your LLC in states like Nevada or Delaware if you are a large company, and/or have a significant amount of personal assets. That being said, it is important to note that I am NO EXPERT and EVERY situation is different so its best to consult your CPA and attorney!
AND, DON’T FORGET, I added a few new features to the blog recently…
Quick Metrics : This allows you to go in and quickly grab some of the calculations we use to analyze deals.
Tell us about YOUR business: Essentially, SHOW US WHAT YOU GOT. Here you can share with the greater let’s talk Real Estate community what you are doing, what you need, questions you may have, etc. Seriously though, I do hope you all use this as free marketing and work with each other, because I truly do believe in the power of a good network.
Happy Wednesday!
–Erin
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https://www.lawinc.com/where-should-you-incorporate-your-business
https://www.incorp.com/start-a-business/where-to-incorporate
https://www.huffingtonpost.com/aj-agrawal/forming-an-llc-not-all-st_b_8401754.html
https://www.entrepreneur.com/article/287677
https://www.llcuniversity.com/best-state-to-form-an-llc/
https://www.incfile.com/blog/post/best-state-form-your-investment-real-estate-llc/
https://taxfoundation.org/2017-state-business-tax-climate-index/
https://www.legalzoom.com/articles/incorporating-in-delaware-advantages-and-disadvantages