So You Want to Start a Business. Where Do You Begin?
This isn’t a figurative question: one of the main things we get asked about is where—geographically speaking—an investor, who’s buying and selling real estate, should set up a business entity. What makes this question tricky is that there’s no single correct answer: the right solution will be different for a “flipper” than it will be for an investor forming an LLC, and different for a single-state investor than for one with properties all over the place. This post will talk about how various factors will impact your business location.
Where Do You Plan to Invest?
How far afield do you plan to spread your investment dollars? Let’s say you live in Washington state, but you’re going to be investing in Oregon. Right out of the gate, I’m going to recommend that you create your business in Oregon, because that’s where the activity is taking place. If you don’t do any of that in Washington but you file your business registration papers there, you’ll have to turn around and re-register that corporation in Oregon as a “foreign” corporation.
Foreign corporations also come into play with investors who say things like, “I plan to invest in Oregon, I want to invest in Idaho, I’m going to flip properties in California, and I’m also considering Texas.” With a multistate plan such as this one, your options actually get more numerous! You could…
- set up your business in one of those states, and foreign-file in the others, or
- set up your business in a state like Nevada or Wyoming, which offer great tax benefits.
Why Nevada or Wyoming?
Once again, this isn’t a figurative (or existential!) question: the fact is, neither of these states imposes a state corporate tax on your business entity. You’ll have the benefit of an additional layer of anonymity, as well as asset protection, and those are two strong pluses for a business location.
So, for our multiple-state investor and flipper who’s talking Oregon, Idaho, California, and even Texas, the ideal solution might be a Wyoming corporation, from which you can “do it all.”
How Will That Work?
Let’s say I’m planning to flip a property in Texas. I can register a corporation in Texas as a foreign corporation to do that flip; however, what I’d recommend you do is create an LLC (specifically for that flip) in Texas, one that’s 100 percent owned by your Wyoming corporation. When you create this Texas LLC, make a member-managed LLC. If you file this Texas LLC in that fashion, the articles of organization will point back to the Wyoming entity—and your name stays out of it.
Along those lines, we at Anderson do a nominee service that protects identities connected with LLCs. When anyone tries to figure out who’s doing the “new deals” in town, and they look at your LLC, it points back to Anderson, and the name A. T. Mathis listed as the “head honcho”—as they would find him for over 17,000 entities between Nevada and Wyoming! (Yep, this guy is BUSY.)
What does he do? Serve as nominee director, officer, or even manager in your LLC; he lists his name in this capacity with the Secretary of State. Then, he resigns that position, and you become the new director and officer of your corporation. In Nevada and Wyoming you are not required to notify the Secretary of State whenever there’s a change in directors, officers, or managers of limited liability companies—you only do it once a year. Thus, the information isn’t disclosed to anyone.
Why would you want to remain anonymous? Well, in the world of asset protection, it’s your second layer of defense: if they (meaning tax and other creditors) don’t know you have it, they’re not going to go after it. In reality, it’s no one’s business what business you do, in a broad sense, and it pays (in more ways than one) to keep your personal financial affairs as private as possible. In states where you don’t have to worry about reporting changes in your LLC, then, you can keep those details under wraps.
On the other hand, if you try the same strategy in Oregon or Texas, your anonymity protection flies out the window: you’re obligated to notify such states of new officers or directors within a narrow “window” of time, and your information is not nearly as private anymore.
In short, this Wyoming/Nevada process is about as good as it gets for multistate investors.
Closer to Home…
However, I do understand that some of you aren’t going to spread yourselves out so far: you’re just going to invest in your state. Then, the strategy is a little different.
Say you’re that Washington resident who just wants to invest in Washington. You plan to keep all the investing close to home, and you’re not concerned about anonymity. Then, just create one entity, a Washington corporation—which could, of course, be an LLC as well. (Watch one of my segments on the difference between corporations and LLCs to determine which you should set up.) You can also do flips through this entity, but be careful about that. You may not want to flip directly in this corporation or have multiple deals going on there; if one goes bad, it can jeopardize all the others within the company, too.
That’s why I like my clients to have limited liability companies, and this is where your flips should take place. There are several good reasons for dealing through LLCs:
- If anything goes south, the only thing you stand to lose is one LLC. That provides protection for your other deals that you may have going on.
- Maybe more important than even protecting other deals is protecting your brand: if you’re spending money on advertising, say, to get the word out about your business, the last thing you need is to have someone sue your corporation and take it out of the game!
Using LLCs helps isolate that particular liability.
N.B.: Remember, in a Washington corporation, LLC or not, you’re not doing anything to keep your name out of the mix. If anonymity is important to you, think Wyoming or Nevada once more. Create in LLC in Washington, but have it owned by a Wyoming corporation. That way, you get the same anonymity the multistate investor has, even if you’re only doing business in one state.
The Liability Factor
The bottom line is—we at Anderson are all about asset protection. So let me touch on one more issue when it comes to corporations, how shares are owned and held, and the degree of protection you can expect in different scenarios.
No matter what kind of investment business you’re putting together, one thing is true: if you create a structure in which you’re a shareholder, that interest is NOT protected from creditors. In other words, if you get sued, your shares can be taken away. That’s another good reason to set up your LLC so that shares are owned by a Wyoming LLC. That way, if someone asks you if you own shares in a corporation, you can truthfully and honestly answer, “No.” (Because they’re owned by that trusty Wyoming corporation!)
But why would you want an LLC to own your shares? Simple: shares are personal property that can be confiscated in the event of a lawsuit. With an LLC, however, charging order protections prevent creditors from going after your corporation if you’re being sued as an individual. If you want to protect your assets from loss, you’ll want to “surrender” the shares to the ownership of an LLC, where they can’t be touched.
Businesses All Over the Map
See why it’s hard to give one answer to “How do I get started”? Depending on what you want to accomplish, where you want to accomplish it, how much of your identity you want connected with it, and how much protection you need, you can choose several different routes in creating your business entity. To make the best business planning “call,” call US at Anderson—and let our experts get you great results!