I would like my relatives overseas to fund/invest in my real estate investment company. Should I form a multi member LLC? Can I form a LLC in Delaware or Arizona to avoid the $800 fee in CA (I am a California resident). The investors would be relatives from India and Oman.
Are there tax implications for them? How would their earnings be taxed in the US/
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Your question is much more complicated than what could be answered here. Investment matters are highly regulated. Although federal securities laws and state blue sky laws mainly aim to protect U.S. residents, you will still need to keep them in mind. If the business entity will be operating in California, the foreign entity will need to qualify to do business in California, file its annual statement of information with the California Secretary of State, and pay its franchise taxes, so incorporating in another state will not necessarily save you any money. You should consult a knowledgeable business attorney to protect your legal rights.
You question is far more complex than you may imagine. First of all, are you investing in California real estate? If so, you will be taxed by California subject to the yearly $800.00 franchise tax fee. Second, if are not purchasing California real estate, your personal interest in the LLC would still be taxed in California, and the enity will be still subject to the $800.00 fee if you are managing the entity in California. Third, the sale of investment interest in your LLC is probably the sale of securities.
This is a complex investment that will probably require a private placement memoradum and tax opinion which is too sophisticated for a definitive answer on this site.
Phillip M. Smith Jr.
Los Angeles Tax & Business Attorney
Call: 855 IRSTAXBIZ
THESE COMMENTS ARE NOT LEGAL ADVICE. They are provided for informational purposes only. Actual legal advice can only be provided after consultation by an attorney licensed in your jurisdiction. The answer to question does not create an attorney-client relationship or otherwise require further consultation. Mr. Smith is licensed to practice law throughout the state of California with offices in Los Angeles County. He is authorized to handle IRS matters throughout the United States, and is also licensed to practice before the United States Tax Court. His phone number is 323-292-4116 or his email address is [email protected]
I agree with my colleagues. There are far too many legal issues here than you can possibly imagine. You are entering into a highly risky enterprise that will involve quite a bit of legal work before you can even ascertain whether such an investment firm would be viable.
The information presented here is general in nature and is not intended, nor should be construed, as legal advice. This posting does not create any attorney-client relationship with the author (who is only admitted to practice law in the State of California). For specific advice about your particular situation, consult your own attorney.
If you are planning to formulate llcs for the purpose of structuring real estate investments, the $800 minimum fee to the State of California should be the least of your concerns. In all likelihood, the $800 fee will be the least expensive cost you are going to encounter.
The nature of what you are trying to do is complex. There are many areas that you will need to get right including tax concerns, DRE concerns, corporation concerns, foreign investor issues, international monetary transfer concerns.
You should consider getting a good business attorney to advise on these delicate issues. Competent counsel is worth its weight in gold. Sound advice from competent counsel costs some money, but it is definitely a lot less expensive than having to bring counsel in after you have a serious problem to clean up the mess.
This is going to require some sifting through the elements of your question. First, an LLC or a C corporation are the only options for foreign nationals in terms of equity (other than partnerships, etc.). You could form the LLC in Delaware, which I think is preferable. If you do business in California, however, you will pay the $800 as a foreign registered company. As to taxation, I do not think there is a tax treaty between the U.S. and those countries. You will need tax counsel or a knowledgeable accountant to advise you on those matters.
I have several Indian clients with investments in U.S. companies, so it is a common endeavor.
No matter what you do, you're likely going to still have to pay CA franchise tax and CA registration fees. An LLC is a very good vehicle for this sort of investment, but there are numerous other options. For example, you could form a Real Estate Investment Trust (REIT), which offers some operational advantages notwithstanding the fact you have to distribute 10% of the trust's income to investors.
If taxes for your non-US investors are an issue, what you can do is form a "feeder fund" in a tax neutral jurisdiction (Mauritius is usually the place when you're dealing with Indian investors) that would invest in your US fund. This of course adds another layer of costs, but depending on the amount of money at stake, considering such an option may be worthwhile.
My firm and others usually work with counsel in other jurisdictions to address these sorts of issues.
The foregoing is not legal advice nor is it in any manner whatsoever meant to create or impute an attorney/client relationship.
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