Where should I set up the LLC for my Investment Property?

I am often asked some version of the question:

"Where should I set up the LLC which will own my rental property?  Can I use a "better" state like WY, NV, AZ or Delaware, or should I use the State where the property is located?"

In some cases, clients have heard that some states are "better" to set up an LLC.  In other cases, the client may already have an LLC and want to repurpose it to hold property in another State. 

The short answer is that it is most often more practical to use an LLC based in the State where the property is located.  The question is "why"?

An LLC set up in one state would be considered a "foreign" LLC in another state.  Most all states required foreign LLC to register to do business when they own and operate investment real estate inside the state.

Registering as foreign LLC to do business in a state basically requires an application for registration with the Secretary of State. The application will normally include the following information:

1. Name of the foreign LLC: You will need to provide the exact legal name of the LLC as it appears on the LLC's formation documents.
2. State and date of formation: You will need to provide the state in which the LLC was originally formed and the date of formation.
3. Principal office address: You will need to provide the address of the LLC's principal office. This is the address where the LLC's business is primarily conducted.
4. Registered agent and office: You will need to designate a registered agent for service of process in the destination state. The registered agent must have a physical address in that state where legal documents can be served on behalf of the LLC.
5. Management information: You will need to provide information about how the LLC is managed. This may include whether the LLC is member-managed or manager-managed, as well as the names and addresses of the LLC's managers or members.
6. Authorized representative: You will need to provide the name and address of an authorized representative who can accept service of process on behalf of the LLC if the registered agent cannot be reached.
7. Filing fee: You will need to pay a filing fee at the time of filing the application and an annual report and update fee each year.

You may have noticed that this is basically the very same information you need to file the LLC itself.  In other words, you are refiling the LLC in the state where it will be holding property.  This also means that if there is a dispute, you have exposed that LLC to be administered under the laws and courts of the state where the property is located. 

YOUR RESULT: You now have an LLC registered in the state where the property is located, and you are exposed to the laws and rules of that state, including any excise taxes, franchise or other requirements for LLC in that state.  You are also now maintaining that LLC in two states, the original registration state, and the state where the property is located, thus increasing the complexity and cost of maintaining your LLC.

THE SOLUTION: For these reasons, it is generally our recommendation to use the state where the property is located for the LLC and then to use a "better" state to set up a holding company to own the LLC.  Our preference is what is called an Arizona Asset Management Limited Partnership (AMLP). You can find out more about why we like the AMLP here.

Note: Some states do have an exception from the registration requirements if the LLC holds only passive investment real estate; however, even then the LLC would likely be subject to the laws of the state where the real estate is located and therefore there is often no real benefit from using a foreign LLC. Each situation is different and you should always consult your attorney to explore all of the considerations brought up by this article.