When you first begin learning about asset protection, it’s not unusual to experience a bit of decision fatigue. You’ll have many choices to make in the early days of creating your plan, which is one of many reasons why experienced legal counsel can make a meaningful difference in both the effectiveness of your strategy and the ease of implementing it. Of the many choices you will have to make is which state to form your asset protection entity in. We’ll dive deeper into why this decision matters so much in a moment. But essentially, you’re picking which state’s business, corporate, asset protection, and tax laws your company will have to conform to.
Smart investors can save hundreds or even thousands annually by choosing wisely, learning about their chosen structure, and following through with good business practices and compliance. While we strongly believe there are very few one-size-fits-all solutions in the law generally, our experience at Royal Legal Solutions has shown us that Texas is an extremely pro-business state with laws that are highly beneficial to the real estate investor willing to take advantage of them. And of course, we are all too happy to show you how, complete with examples. Why is Texas a great state for real estate asset protection, and what can its strong laws and structures do for your real estate assets? Let’s hit on the basics.
Part of the reason we even get to have this discussion around Texas’s benefits from an asset protection standpoint is that they are technically available to each and every one of you. You see, when you construct an asset protection plan, one of the first things we do is establish an entity to limit your liability, sort your assets, and streamline your business. Many investors automatically assume that entities in their state will be the most beneficial to them, but this belief is rarely true in practice. In fact, you have the freedom to form a company in any state–regardless of whether you live there, own property there, or never even intend to visit.
What this means for the investor is actually something quite liberating. If you don’t like the laws in one state, you can change the playing field and the rulebook by moving to another. Find a state whose laws you and your attorney like a little better, or with financial or tax advantages that directly help you, and you’re free to form your business there. For this reason, anyone reading this article may decide that a Texas-based entity is more efficient for them. Let’s take a look at an example.
Dawn is a multi-family investor who is fairly new to the real estate game. But she’s also a great student. Before she even bought her first property, Dawn had done a great deal of research, gotten herself a mentor, and sought the advice of several competent professionals. We encourage everyone to be like Dawn in these ways.
Dawn knew she was interested in buying three properties within her first year of investing. While she was learning everything she could about the basics of asset protection, she learned that the best asset protection plans isolate each asset into its own holding company (usually an LLC or Series). She set about looking at ways to do this and quickly realized she had two options:
Form a Traditional LLC for each property. This would mean she’d pay three filing fees and any annual fees thrice as well. And that’s assuming she stays at three properties!
Form a Series LLC, and place each property in its own Series. This option is cheaper, as Dawn would only pay one filing fee for the parent company, and adding Series is far easier than adding entire new entities. This option can easily be scaled up at no additional cost.
Dawn quickly settled on the Series LLC as her best option. She knew she wanted to own multiple assets, pass through her investment income onto her personal tax returns, and scale up indefinitely at no additional cost. She was correct that the Series LLC offers all of these benefits. Her first move was to look up a local attorney near her home in Hawaii.
A few minutes later, she learned that there was no Series LLC in Hawaii. Now, if you find yourself in a situation like Dawn’s, don’t stop here. Dawn didn’t. She decided to form a Series LLC in Texas, and is doing great with her diverse and growing real estate portfolio. All of her properties are in Hawaii. She found the structure affordable, got proper support in using it, and doesn’t see any reason to do things differently. After all, the Series LLC was Dawn’s first step towards becoming judgment-proof. She doesn’t have to worry about losing money to lawsuits. Instead, she focuses on growing her business.
A Texas-based Limited Liability Company or Series LLC is still recognized in all 50 states. You can run your business from the privacy of your home with the help of an affordable registered agent or compliance service. Even if you opt to DIY or simply get help from an attorney with company creation, you will still get to enjoy the many benefits of operating in Texas.
Let’s do a brief rundown of costs for the most common types of companies, LLCs. In Texas, you’re not looking at much. These entities can value in the thousands for creation and maintenance if improperly established. But done right with professional help, here’s a rough estimate of what you’re looking at in terms of what you owe the state:
In other states, you may have to pay taxes. You might have to meet regulations like holding meetings and taking minutes. Your choices may be limited to Traditional LLCs only in your home state, as not every state offers every asset protection entity. When evaluating the differences between Texas and other states, be sure to do an actual side-by-side, checklist-style comparison. You’ll find across these criteria, Texas is very favorable to small business owners and real estate investors.
Texans are a rare and diverse breed, but most of us can agree we’d rather not pay additional taxes. At the state level, real estate investors aren’t charged any income tax. Consider that just one more cost that you can be spared by forming an entity in Texas. If you operate in California, you can look forward to the $800 Franchise Tax all companies must pay (with one critical exception: the Delaware Statutory Trust).
These fees and anxieties simply don’t apply in Texas. Enjoy keeping a little bit more of your money where it belongs: in your business.
The Lone Star State also offers many means of access to creditor protection. Texas’s legal protections for debtors are among the strongest in the country. The state’s debtor protection statutes provide legal protections for certain types of assets. Examples of these protections include the following:
The spirit of these laws is to allow people to live normal lives even if they find themselves in debt. The Legal Eagles out there may be interested to know most of these protections originate from the Texas Constitution. But they have been carried on and reinforced in the centuries since, meaning Texas has more property exemptions than most states.
If you’re eyeballing Texas for your company, our consult experienced asset protection attorneys before making major changes to your company or asset protection plan. While we think it is wonderful for real estate investors to educate themselves, ultimately, if you want these structures to give you the maximum amount of protection the law allows, you will need the help of legal experts. Bring your research and questions. We’re happy to guide you.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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