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I'm planning to buy rental properties in MO, OH. What's the best strategy to form an LLC?

Asked by: sean  — 3 January, 2013

I live in CA, but I’™m planning to buy rental properties in MO, OH. Pretty much all of the investors I know have told me that I should set up an LLC in NV (or Wyoming) and foreign register in MO, OH for a number of great reasons; NV offers no taxes, complete anonymity of the members, etc. But others have told me that those benefits only work in NV State, and that if a tenant in MO sues me, LLC in NV doesn’t do anything good because it’s in different jurisdiction.

Many people I know espouse forming an LLC in NV heavily over in MO or OH, and I think there must be a reason. But if the foreign registered LLC in MO becomes subject to the laws of MO, why would I set up an LLC in NV? What would be the best way to set up an LLC for the long business goal? Thank you.

Answered by: admin  — 3 January, 2013

Dear Sean,

There is a lot of misconception regarding why some states are “better” than others from incorporation point of view, because people are unaware of many little details (not to mention the whole lot of unwarranted wishful thikning). For example, people choose states like Nevada, because there is no corporate income tax there, not realizing that they are forming an LLC (as opposed to C-corporation), which has no income tax anyway. Also, although some states do provide a degree of anonymity, when it’s foreign qualified in a less anonymity-frienly state all the anonymity goes down the pipes.

Also, when real estate is involved, you never want to group two or more properties under one legal entity, because if your Missouri tenant breaks a rib in your Missouri property, you might have to sell both your Missouri property your Ohio property just to pay them off, since your LLC would go bankrupt. That’s the idea behind “limited liability” – you want to limit the liability of each property to itself.

So the conclusion I derive from all that is that you should have an LLC for each property you hold, and form that LLC in the state where the property is located.

If you want anonymity you could actually form a holding company in a state like New Mexico, which is famous for its anonymity and low formation and maintenance fees, and then own all the property-holding LLCs with this NM LLC. This way even if the state you form new LLC in requires you to list the members in Articles, you would list the NM LLC, and there is no way to know who owns it, so this way you get anonymity in the most anonymity-unfriendly state.

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