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Switching to Out-of-State LLCs
For clients moving an LLC that holds real property, we generally recommend forming a new out-of-state LLC for each property, rather than converting the existing entity. While both states permit statutory conversion, forming a new LLC and transferring the real property via quit claim deed to the new LLC is typically a more efficient process.
Real Estate Transfer Tax: Because transferring the property to a new entity requires a deed transfer, the transfer will need to meet an exemption from Washington's real estate excise tax. A transfer to a new LLC with the same proportional ownership as the prior Washington entity should qualify as a "mere change in identity or form," with no change in beneficial ownership, per WAC 458-61A-211(2)(d), which permits "the transfer by a corporation, partnership or other entity of its interest in real property to another corporation, partnership, or other entity if the grantee owner(s) receives it in the same pro rata shares as the grantor owner(s) held prior to the transfer." In other words, so long as ownership percentages in the new entity match the prior ownership exactly, and no consideration changes hands, the transfer should qualify for the exemption and cost filing fees rather than excise tax on the property's value.
Out-of-State Options: Many states outside Washington offer strong privacy protections for company ownership, and there's no requirement to live in a given state to form an LLC there. Common options include Wyoming, Nevada, New Mexico, and Delaware.
Washington Registration Requirements
If an out-of-state LLC only holds real property in Washington, it generally does not have to register as a foreign entity in Washington. Washington law excludes "owning, without more, property" from the activities that constitute "doing business" and trigger foreign entity registration. RCW 23.95.520(1)(j).
Rental Exception: If the property held by the LLC is being rented out, foreign entity registration is likely required, as renting the property out constitutes "doing business." The statute doesn't specifically address rental activities, but collecting rent is likely to be interpreted as doing business within Washington.
Other LLCs
The same general approach can typically apply to other business entities, with a few additional considerations:
- Whether those LLCs are party to contracts with third parties that would require consent for assignment.
- Whether those LLCs are party to loans, in which case lender consent should be obtained before taking further action, to avoid triggering a default under the loan.
Before Moving Forward
Any decision to relocate an LLC out of Washington (and how to handle foreign registration for a specific property) should be made in coordination with your CPA and tailored to your particular plans for the property, to confirm the approach fits your overall tax strategy. If you're considering this kind of restructuring, we can help evaluate the legal steps involved.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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