When it comes to setting up an LLC, you have most likely heard of Wyoming, Nevada, or Delaware and their various benefits. Is this a War of the States for your business? To some extent, it is but in my opinion; I believe it to be a battle of pitchmen who believe these entities are the end all be all for any business regardless of type, location, benefit, and cost. To be fair to all of the non-legal providers of these entities, I am no slouch about touting the benefits of either state and stand guilty as charged when it comes to establishing many for my clients; but, the question I receive most often is which state should I chose. If you contacted NCH, Inc. of Nevada the answer is obviously “Nevada” conversely if you ask Wyoming Corporate Headquarters of Wyoming the answer will be “Wyoming” and the same holds for Delaware Inc.
What is an investor to do with all of the conflicting opinions regarding where to set up your investing business? Simple – consult with a “knowledgable” professional who understands the benefits of each state and YOUR BUSINESS. Consider John a recent client acquisition from NCH, INC. (My thanks to this company for screwing so many people up it ends up being a great source of business) John found out the structure his NCH advisor set him up with to hold his various Illinois rentals was a complete failure. John was sold multiple Nevada LLCs to hold his Illinois rentals. You can probably envision the sales pitch. “Nevada offers the best asset protection in the country. Not going to Nevada is risking your investments.” In reality, John’s structure was putting him at risk as he discovered when he attempted to evict a tenant. The tenant’s attorney successfully defended the eviction by pointing out to the court John’s LLC was not registered to conduct business in Illinois. John’s tenant was able to stay three more months rent free while John worked to register his Nevada LLC in Illinois and start the eviction process over anew.
John’s problem is not unique and is symptomatic of investors not understanding how Nevada, Wyoming, or Delaware work in an asset protection plan. This goes back to my earlier recommendation to use a “knowledgeable” advisor when putting your plan together. Here are some general rules to consider when using either of these LLCs with your investing:
Rule #1 – Hold Title in an LLC filed in the State Where the Property is Located (Rental Property)
John’s problem was owning Illinois real estate in a Nevada LLC. Conducting rental activity through an LLC is considered doing business in the state where the property is located. If the LLC is the owner of the rental, then state law requires the LLC be register in the state. John’s ultimate fix was to file his Nevada LLC in Illinois. The fix cost John $1,000 more for dual state filing, i.e., Nevada and Illinois, and he lost all of the Nevada benefits upon registration in Illinois.
Rule #2 – Have your Rental State LLC owned by a Wyoming, Nevada or Delaware LLC (Rental Property)
John opted for Nevada because it offers anonymity (no one can discover John’s involvement with this LLC through the secretary of state, no taxes, and great charging order protections from John’s creditors. John could have maintained all of these benefits by setting up one Nevada LLC then making it the member manager of his multiple Ilinois LLCs. John could have set up ten Illinois LLCs all owned by one Nevada LLC that was in turn owned and controlled by John. John’s Nevada LLC would extend its anonymity to the Ilinois LLCs through the member manager setup, i.e., if you look at the Illinois Secretary of State each LLC will list the Nevada LLC as its member manager. Further, John will still receive the favorable charging order protections of placing a Nevada LLC between himself and his assets.
Rule #3 – Disregard Rule #1 if your State has High Filing Fees (Rental Property)
You probably think this is just like an attorney to contradict himself just to sew confusion. In reality, I want you to know this is another option. Let’s assume you have ten properties in California. If you create 10 California LLCs, the annual fee is $8,000. OUCH! An alternative approach would be to set up ten land trusts to own these properties then create 10 Wyoming LLCs ($150 a year renewal) to be the beneficiary of the land trusts. Do the math, and you quickly realize your annual costs were just reduced by $6,500. Well not so fast because if you use this strategy, you will need an entity filed in the state where the properties are located to manage the tenants. In my example, I would recommend the client set up a California Corporation to serve as the property manager and collect all the rents on behalf of the LLCs.
Rule #4 – Set up a Wyoming LLC for any Flip Deals
WAIT! You are probably thinking to flip a property in Arizona is doing business in Arizona so why set up a Wyoming LLC just to register it in Arizona. The answer lies in what necessitates registration. The general rule among all states is if an entity is engaging in regular and continuous contact with a state it must register to conduct business in the state. Rental activity is regular and continuous, i.e., you own real estate that collects rent each month from a tenant. Flipping is an isolated occurrence. You are buying a property in an LLC then flipping it. After flipping the property, you will dissolve the Wyoming LLC. Thus, the entity only engaged in one transaction nothing rising to the level of regular and continuous. Keep in mind, if you want to use the same LLC for additional flips in Arizona then disregard this Rule and follow Rule #1 and have a huge risk tolerance because you are increasing your likelihood of a lawsuit by flipping multiple properties through the same LLC.
Deciding Between Wyoming, Nevada, and Delaware
Now we have some rules then the next question naturally becomes where do you set up the holding/flipping LLC – Wyoming, Nevada, or Delaware?
For many years I touted the benefits of Nevada over Wyoming or Delaware (see chart below). Namely, Nevada and Delaware have business courts offering a forum where only experienced judges adjudicate matters involving business entities. Business courts should not be underscored given the rash of poor charging order decisions handed down by inexperienced judges in other states. However, this benefit comes at a significant annual cost, $350 for an LLC and $725 for a corporation in Nevada and $300 for an LLC in Delaware (Corporations are only $225). Are you are wondering when does the cost justify the added protection? I typically recommend Nevada or Delaware when my a client’s net worth exceeds 8 million.
All three states provide some form of anonymity for business owners; however, the process can differ depending on the entity type. Nevada allows for and requires the use of a nominee manager or officer at the inception of the entity to create an anonymity shield. If you are unfamiliar with this term, a nominee manager or officer is someone who serves in either position for the limited purpose of filing the entity’s public disclosure. The nominee does not take any control over the business and is reappointed on an annual basis to maintain the anonymity of ownership/involvement. States other than Nevada or Wyoming do not allow for this type of structure.
Wyoming or Delaware take a different approach to anonymity. When creating either a corporation or LLC in Wyoming or Delaware, no information is collected on the members, managers, officers or directors with the initial filing. Thus, for the first year of formation, the secretary of state does not have any information on the parties controlling the respective business entity. (Remember, Nevada collects this information immediately.) On an annual renewal basis, Delaware and Wyoming diverge. Corporations in both states require the disclosure of directors and officers, but both states permit the use of a nominee to protect your identity. Regarding LLCs, Wyoming, unlike Delaware, requires an annual report. Hence, like Nevada, a nominee is used to protect your identity after the initial filing.
The primary benefit to a nominee can also be its greatest detriment when it comes to dealing with banks and lenders. We use anonymity to keep our involvement with an LLC or corporation private, but lenders are not comfortable with privacy. Consider how you might respond to someone who asked to borrow $100,000 but could not prove his identity, and the identity he did provided matched 17,000 other people. A lender will react the same way if your LLC shows it is run by someone other than you i.e., a nominee. This is why I would avoid Nevada if you plan on using a HML to acquire property in your LLC. Using Wyoming or Delaware is preferable because neither state lists information on the LLC, thus you have anonymity without the concern. The same reasoning also applies to banking. Let me show you how this works.
When opening a bank account for an entity, the bank will typically check the secretary of state’s website to see if you are listed as a manager or officer of the entity. If you have a Nevada entity with a nominee, your banker will most likely require you drop the anonymity and publicly expose your involvement with the entity before an account is opened. Since Wyoming and Delaware do not publish this information (Wyoming does in subsequent years hence you should open your account the first year), the bank will not find any information and will instead look to your operating agreement to see who is involved. Obviously, in your operating agreement, you will be listed as the manager/officer.
Wyoming charges $100 to form an LLC and $50 to renew (Delaware is $90 to form and $300 or more to renew). Nevada charges $425 to form an LLC and $350 to renew. Corporations in Nevada are $725 to form and $650 to renew. Depending on the type of business you are conducting, filing fees add up. I have some clients who flip more than 25 homes a year. If any of these real estate investors used Nevada for their flipping LLCs, their annual cost would be $8,750 annually.
There are no state income taxes on Nevada, Delaware or Wyoming entities unless the entity is conducting business in the state.
Looking to Move out of Nevada?
If you have a Nevada entity and would like to decrease the annual maintenance fee, consider moving your LLC or Corporation to Wyoming. Wyoming law allows for true business continuance in its corporate laws. Under Wyoming law, continuance is a process by which Wyoming creates the legal fiction that the LLC or corporation has always maintained its domicile in Wyoming. Your entity retains its original incorporation date, and anyone examining the Wyoming secretary of state website will see an entity dating back to the day it was created in the original state. This is important for businesses who want to maintain the many benefits of the longevity and continuity of operation.
If you would like to set up a consultation to review your situation follow this link: https://andersonadvisors.com/30minuteconsult/