Series LLCs and the State of California


Diane Kennedy and I did a webinar recently on Series LLCs. You can see the replay for a short time over at www.ustaxaid.com/series. And check out our limited-time offer that incudes having a Series LLC formed for you, here: http://www.ustaxaid.com/shop/Series-LLC-Year-End-Special.html.

We had a bag full of questions and ran out of time. So this week all of my blog entries are going to deal with answering your questions from the webinar. And, of course, if anything you read this week brings on another question, ask away!

Today’s blog is all about California and the Series LLC. This was a very popular question – in fact, questions relating to California were probably the most numerous. So I’ve tried to address them all in this entry.

Does California have Series LLC law?

Question:         Can I set up a Series LLC in California?

Answer:           No, not directly. California has not yet enacted its own Series LLC law. However, they do recognize Series LLCs coming in from other states through cross-registration. So if you wanted to use a Series LLC in California, you would have to first register in a Series LLC state, then bring the LLC into California.

Question:         How does California’s $800/year franchise tax apply to Series LLCs?

Answer:           Even though California doesn’t have its own Series LLC law, the Franchise Tax Board is happy to talk about them (https://www.ftb.ca.gov/businesses/bus_structures/SLLcompany.shtml). California takes the position that if a Cell wants to claim the benefits of Series LLC law, such as limiting liability between Cells, then it must be treated as separate entity for taxes. And that means the $800/year minimum franchise tax is going to apply to each Cell, along with the Parent.

Question:         How does the Series LLC work with California real estate portfolios?

Answer:           California is in kind of a funny position here. Although there isn’t specific state law, there is very specific tax guidance. So it’s hard to say that the state would not uphold asset protection between the Cells, given that. On the other hand, will you save money? Not as much as perhaps you would in other states. You would still have to create a Series LLC, perhaps in Nevada, and then cross-register it into California. You would have to maintain the structure in both states. You would have to pay the $800/year franchise tax on each Cell. All of those things add up. On the other hand, if you were setting up separate California LLCs each time you wanted one, there are costs associated with that, too. There is also a time component. It’s almost impossible to have a company created in California in less than about 2 weeks. A Series LLC Cell can be created in 30 minutes. You won’t have legal fees, filing fees or resident agent fees to create a Cell. You won’t have to remember to pay the maintenance fees every year, apart from the Parent LLC. I think that the Series LLC is certainly an option for CA portfolios, as much so as any other business structure plan.

Question:         I thought that disregarded LLCs were exempt from the $800/yr franchise tax. Why wouldn’t that extend to Series LLCs too?

Answer:           Up until the beginning of 2011, that was true. There was an exemption from the $800/year franchise tax. But that all changed at the end of 2010. California introduced a new nexus law, which basically said that if you, the owner, live in California, then the LLC should be cross-registered into California, no matter where the LLC’s business or real estate holdings are.

Question:         Does that mean if I have real estate in another state I have to file in California?

Answer:           Yes – at least almost all of the time. Here’s how it goes.  California believes that if you, as a California resident, have any control over an LLC with real estate operations, then regardless of where the real estate physically is located the company needs to cross-register into California and pay the $800/year franchise tax. Your control may be limited to calling up a property manager in another state … it doesn’t matter.

Question:         What if I set up a California company to manage a Nevada or Delaware Series LLC instead?

Answer:           That’s an interesting question. In theory, if your management activities are provided through a California company, for example, acting as the Manager of a Nevada Series LLC, which owns property in Georgia or elsewhere, you could argue that you’re meeting the CA requirements through this management company. But if your property is physically inside California, this approach would absolutely not work.

Question:         I have an S-Corp and live in CA. I have 2 businesses currently, one is the S-Corp itself, the other is just a DBA under the main S-Corp. Is the Series LLC something I should look into using?

Answer:           Your 2 businesses have no protection from each other as you have described. They are looked at, legally, as the same thing. So if you were looking for extra asset protection, and to segregate the assets and liabilities of each business into a separate structure, then yes, a Series LLC could be used for this purpose. You would have the same tax issues as we have already talked about. But you’d have a structure that could grow and flex quickly with you – which might be to your benefit if you are starting a number of businesses.

Question:         We have a nationwide marketing organization where most sales are done in other states. What should we do?

Answer:           One thing you might want to think about is containing your taxes by creating a California-only company to deal with all of your California-based sales, and then having another company – maybe a Series LLC – to deal with other parts of the country or the world.

Question:         What entity do you suggest in California for a new investor who is wholesaling properties?

Answer:           You could certainly use a Series LLC, or even a regular LLC. In your case though, your tax situation is different, and probably you will want to make a C or an S Corporation election to avoid self-employment tax. The nice thing about this approach is that it lets you separate out your properties as you pick them up, and before they are resold.

Summing up California and Series LLCs

I guess the best thing I can say about using a Series LLC in California is that the asset protection and liability protection will most likely be upheld, even though it doesn’t have its own Series LLC law. And, while you won’t save as much money as you might in other states, you will save some money – which is better than spending more!

 

At Smart Business Incorporation, we specialize in helping investors and business owners develop structures to run their businesses, protect their assets and keep as much of their earnings as possible. If you want to know how to best structure your next business, visit our website or drop us an email at info@smartbusinessincorporation.com. We’ll be glad to help.

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