Why You Should Not Get Legal Advice from TikTok
Over the last couple of years, there has been a dramatic increase on social media platforms like TikTok, Instagram, and YouTube of content creators pushing the formation of multi-state Limited Liability Companies (LLCs) for the purposes of real estate investing. These influencers promote the idea that by creating an LLC in a “business-friendly” state, such as Wyoming, you will be able to access unparalleled asset protection, privacy, and tax advantages, regardless of where the real estate is physically located. The content is designed to draw you in with the promise of revealing the secrets of the ultra-wealthy with titles like “Mastering the Art of Asset Protection with Wyoming LLCs.” The videos promise fast cash, low taxes, and perfect liability protection. However, in truth, these claims are often misleading and can lead to significant risks.
The Multi-State Trend
In the simplest terms, a multi-state LLC is a business entity registered in one state that conducts business in various other states. Influencers would have you believe that the formation of an LLC in a state with lower taxes and greater asset protection laws would somehow benefit you in other states. This is simply not true. These social media posts often forget to disclose a key fact: your LLC must register in, and comply with, the laws of the state where the real estate is physically located.
The Dangers of Multi-State LLCs
In Virginia, as in most other states, a foreign LLC must register if it transacts business in the Commonwealth. The LLC must comply with all administrative requirements, as well as pay state-specific fees for each state in which the LLC is registered. For example, a Wyoming LLC that owns rental property in Virginia is still required to register as a foreign LLC in the Commonwealth of Virginia, file annual reports with the Virginia State Corporation Commission, and pay annual fees to the same. These requirements effectively double the administrative burden of owning the rental property as these requirements must be satisfied in the state of incorporation as well as in the state where business is being conducted. Furthermore, failure to comply with state-specific requirements can result in civil penalties and may eliminate any liability protection provided by the LLC.
Another common misconception is that forming an LLC in a specific jurisdiction can mitigate or eliminate taxes. This is untrue. Virginia, as with most states, will tax income when it is derived from sources in that state. For instance, if a Wyoming LLC owns a Virginia rental property, the LLC will be required to pay Virginia tax on those earnings.
Social media posts also often praise the enhanced asset protection of certain jurisdictions. This is misleading. Although some jurisdictions, such as Wyoming, may limit creditors’ rights to LLC assets, these protections are generally only available to entities conducting business entirely within that state. If you were sued pursuant to conduct arising from business transactions in another state, you would be subject to the laws of that jurisdiction and may not receive the promised level of protection. Asset protection strategies absolutely must be tailored to the specific state in which you are conducting business.
In addition to the previously mentioned pitfalls of multi-state LLCs, there are significant ongoing compliance requirements. These requirements have the potential to become overwhelming, depending on the number of states in which your LLC operates. Beyond the initial setup costs of the LLC, you will be required, in every jurisdiction, to maintain registered agents, file annual reports, and understand and comply with state-specific rules and regulations. More often than not, the costs of compliance outweigh the perceived benefits of establishing multi-state LLCs.
Additionally, failure to comply with state regulations can subject you to significant penalties. Many states can and will impose back taxes and fines on businesses that fail to register to transact business correctly. Some states also prevent a non-compliant foreign LLC from accessing the courts. Virginia, for example, does not allow foreign LLCs to file lawsuits – such as filing for the eviction of a nonpaying tenant – if they are not properly registered with the Commonwealth.
A Better Approach
Rather than follow risky advice from social media influencers, individuals should focus on tried-and-true legal strategies. The most appropriate course of action is to secure the services of a professional to establish your LLC in the state where the real estate is located. This approach reduces both complexity and compliance costs, but most importantly, ensures the entity is created correctly.
For individuals with property in several different jurisdictions, it may be prudent to form a separate LLC for each property in the state where the property is located. This approach can help to reduce the complexity and compliance issues associated with multi-state LLCs.
We also recommend working with an experienced attorney when creating your LLCs, as well as enlisting the services of a CPA to assist with tax planning.
Final Thoughts
The explosion of financial content on TikTok, YouTube, and similar platforms has created a minefield for potential real estate investors by spreading risky, misleading, and sometimes outright false advice. While LLCs, when used correctly, can provide a variety of benefits to a potential real estate investor, how the LLC is constructed is critical to its success. Failing to understand the legal and financial consequences of forming a multistate LLC can lead to unnecessary expense, compliance issues, and potential liability.
If you are considering the creation of a business entity, contact your JGB attorney for a consultation to ensure that your business will support you as you achieve your goals and objectives.