California Landlords Using LLCs versus Business Trust
Many landlords use LLC to hold title to their income properties. The idea is to insulate themselves from liability and protect their other assets. They also follow lawyer claims that LLCs are private. Let’s take a deeper look.
LLCs are subject to the following:
- Secretary of State
- County Recorder
- Internet Search
- Unlawful Detainers
LLCs includes statutory obligations to the Secretary of State. You cannot create an LLC yourself. You must ask the state for permission (a charter) to operate one.
Obligations include annual filings, managers, fees, franchise taxes, gross receipts tax, resident agents, etc. In exchange for this effort you are afforded asset protection and limited liability from personal assets. But these features are somewhat minimized by several other unspoken factors.
Your shareholders are indeed private. However, the LLC organization itself is a digital record. This means anyone can find it on the internet. It’s guaranteed you will receive tons of unwanted junk and spam mail solicitations.
And the LLC is again listed on real property you own in the County Recorder’s database which is also on the internet.
Then when it needs to file an unlawful detainer action the lawyers have baked a tasty cake with the legislators. CA laws demand that you hire a lawyer to represent you. But this is only partially correct. More on this later.
So imagine the landlord thinking an LLC is the smart way to go. Then when a problem situation arises with a tenant they realize a lawyer is required.
Under California law, only a natural person may appear in court on their own behalf. An artificial entity (such as a corporation or LLC) must be represented by an attorney licensed to practice law in California.
Under Business & Professions Code § 6125: “No person shall practice law in California unless the person is an active member of the State Bar.”
Now you automatically have a 3rd party in the process. Find a lawyer who answers the phone or returns your call within a day or two. They tell you how much you will pay. They may or may not be good communicators. They may or may not be responsive to deadlines. Is it any wonder this leads to extreme frustrations in addition to a problem tenant. It’s a double whammy.
Here’s your alterative – use a business trust.
Four Big Advantages:
The business trust can also provide you with limited liability and asset privacy. It actually offers much more and is easier to operate.
- Secretary of State – NO
- County Recorder – Anonymous
- Internet Search – Unlisted
- Unlawful Detainers – Lawyers Optional
It doesn’t need to register with the Secretary of State which avoids all sorts of filing hassles year after year. This also means it’s unlisted on the internet. And if you get the paperwork done right your ownership is anonymized in the County Recorders records.
You can find them in CA Corporations Code 174.5 and the Revenue & Taxation Code 23038. Furthermore they’ve been validated by the US Supreme Court and the IRS.
Here’s how it can help you in the event of unlawful detainer action.
Just like Corporations and LLCs, a Business Trust must be represented by an attorney licensed to practice law in CA. This is because trustees are acting in the best interest of their beneficiaries. They have a fiduciary relationship.
However if the beneficiary is a natural person and is the landlord they can represent themselves ‘pro se’ in court proceedings.
Since proceedings can get tricky they might consider using a licensed ‘unlawful detainer assistant.” They are far less costly than a lawyer. At least begin with this step first.
Optional:
It’s easy to figure out how much net equity anyone has in a property. Search the property records online. Quickly determine the approximate market value of any property. Then see what loans are outstanding.
For example, a property is worth $3m. There is a $1m loan outstanding. Simple math tells us $2m equity. Would you ever tell a stranger you have $2,000,000 of net assets? You don’t need to. Anyone with an internet connection can figure it out.
To protect or block that $2m equity have the LLC sell the property to a Business Trust on an installment sale or demand note. Now there’s only $10k exposed. Feel safer?
Summary
LLCs are the standard method for owning investment real estate in California and many other states. But there’s far more than just limited liability and asset protection. Paperwork, fees, annual filings, and internet exposure leave thousands of landlords frustrated and searching for an alternative.
A simple solution that provides privacy and anonymity is the business trust. It has many other advantages that offer unique benefits to property investors.
