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My sister, brother and I (who live in California) want to invest our money in Arizona real estate. We would like to hold the property in an LLC for liability reasons, and we would really like that LLC to be registered with another state, since CA has a minimum tax of $800 / year, which is a significant amount considering we're seeding the company with only $30K to begin with.

We're having a hard time figuring out if it's even possible to avoid that $800 fee by registering the company out of state. We can only find bits and pieces of information in articles around the web, some of which hint that it's possible, while some say that if you live in California and own a business (anywhere), they will come after you for the $800 fee. Does anyone have any experience with this, and can either fill me in on how you went about it or point me to a good informational source? Thanks!

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The question itself may have merit, but the title is misleading. It's an LLC question, not really about real estate. –  JoeTaxpayer Jun 25 '12 at 3:09
    
Excellent point, thanks for the edit. –  jeremiahbuddha Jun 25 '12 at 22:11
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up vote 4 down vote accepted

You won't be able to avoid the $800 fee. CA FTB has a very specific example, which is identical to your situation (except that they use NV instead of AZ), to show that the LLC has liability in California. State of formation is of no matter, you'll just be liable for fees in that state in addition to the CA fees. This is in fact a very common situation (that's why they have this as an example to begin with).

See CA FTB 568 booklet. The example is on page 14.

I suggest forming the LLC in AZ/CA and registering it as a foreign entity in the other state (AZ if formed in CA, the better option IMHO, or CA if formed in AZ). You'll have tax liability in both the states, AZ taxes can be credited towards the CA taxes.

Instead of forming LLC, you can cover your potential liability with sufficient insurance coverage.

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First of all, thanks for this excellent answer. I think that the relevant text you are referring to is "LLC A owns an apartment complex in Nevada. The managing members of LLC A are located in California. The total income derived from the Nevada apartment complex (the rental income) is attributable to Nevada and therefore not includable in the calculation of the LLC fee." The legaleeze is a little dense for me, but it almost seems like the "not includable in the calculation of the LLC fee" means this situation is exempt from the LLC fee? Would you mind elaborating a bit on this? –  jeremiahbuddha Jun 25 '12 at 23:04
    
@jeremiahbuddha the LLC fee is the income tax on the LLC gross receipts, but you pay franchise tax of $800 for the right to do business in California. The LLC fee and the franchise tax are not the same. –  littleadv Jun 25 '12 at 23:24
    
I'm still a little fuzzy on this, but I appreciate the comments. My sister and I are going to meet with a lawyer in the coming weeks, and I'll update my answer above with what we end up doing ... –  jeremiahbuddha Jun 26 '12 at 2:37
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