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LLCs For Out of State Rental Properties ~ Thought Bomb! 💣

In this thought post, I attempt to explain my thoughts on forming LLCs and/or foreign filing LLCs for out of State rental properties. Let’s go!

Table of Contents

  1. Why I First Look To Forming Entities Where The Property Is Located
  2. Why Foreign Filing is Good For Out of State Owners But Forum Shopping Isn’t Good For Anyone
  3. Why You May Not Need To Form a Business in The State or Foreign File
  4. The Main Legal Issues Summarized
  5. Four Options of Holding Out of State Rental Properties Using Entities Summarized

Why I First Look To Forming Entities Where The Property Is Located

General Thoughts: Most States consider renting properties to be “doing business”. Out of State LLCs that are not registered in the State where the rental property is located are not authorized to “do business” there. This means the Courts will not recognize its limited liability protection and they can be penalized/fined by the local government for conducting unauthorized rental business. For that reason, forming an LLC to hold rental property where the property is located is my general recommendation.

Why Foreign Filing is Good For Out of State Owners and Why Forum Shopping Isn’t

Alternative: An alternative to forming an LLC in the jurisdiction where the property is located, is to register an out of State entity as a foreign entity in the State where the property is located. This is called Foreign Filing. I typically recommend this option to my out of State clients.

The “drawback” of foreign filing is that the LLC will become subject to the rules of the jurisdiction where the property is located with regards to its business activities there. This will “negate” the purported benefits of forming an out of State entity in more business friendly jurisdictions. That’s why my first thought is to form where the property is located and not to foreign file. That said, I think foreign filing is a good option for out of State clients that form entities where they are located, but it’s a bad option for people that are “forum shopping” because the benefit of the advantageous State will be negated.

Why You May Not Need To Form a Business in The State or Foreign File

More Nuanced Answer: In Maryland, a foreign entity that forecloses on a mortgage or deed of trust, and then holds or sells the property is not considered “doing business.” In other words, companies that are note holders can rent properties that they foreclosed in Maryland without foreign filing here.

I haven’t read the “doing business” statute in every Jurisdiction in the State, so as far as I know there are jurisdictions that may be a lot less lax than Maryland is when it comes to “doing business”. Indeed, some may just not care compared to Maryland’s standards. For that reason, I highly recommend that you contact an attorney licensed to practice law in the jurisdiction where the properties you’re considering are purchasing are located.

The Main Legal Issues Summarized

The main take away: But Brian, Did you write all of this just to tell me to consult with an attorney? Indeed, you fell for my trap card! But also to understand what the legal issues actually are so you know what to ask the attorney. The issues are:

(1) Does renting property constitute doing business in the State under your jurisdictions “Doing Business” statute?

(2) Is there an exception for rental properties depending on how the property was acquired? If so what are those exceptions?

Four Options of Holding Out of State Rental Properties Using Entities Summarize

  1. Form local LLC (after checking local rules for “doing business”);
  2. Foreign File out-of-state LLC;
  3. Your out of State LLC can hold an in State LLC that holds the rental property. (But this is really option one).
  4. Not Forming a local entity or Foreign filing because there is an exception to the law that allows you to do that.

I suppose trusts are other ways to consider holding rental properties but that’s a discussion for another post. Thanks for reading!