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Position Held : Int'l Corporate Transactional Attorney

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PostSteady as she goes

The questiion was presented which state is best to incorporate? More specifically when the ultimate goal is to become publicly traded. The answer [as a former licensed investment banker and now a securities attorney] is 1 of 3 states in order of preference, Texas, Nevada and Delaware. These are the 3 best "business friendly states. Considering Texas created the LLC, and considering Texas has more Fortune 500 Companies than all the other states combined, it is no question which state is preferred by public companies. This is due to no state income tax, and very favorable franchise taxes. Its also a Republican state which believes in the support of building small businesses over big government. Setting politics aside, the question on whether to be an LLC, or Corporation, is answered by what is the ultimate goal: becoming public. There are no "public" LLCs. Only corporations can be publically traded. Therefore, if the goal is to raise capital by any type of offering, a corporation is the preferred structure.

The 1st question that would jump right out as corporation is the double taxation issue. But in reality, all that is required is to file the requisite IRS Tax form designating the corporation as a Sub-chapter S Corp. This can then be changed later into a regular S-Corp when that point is reached. However, the registration with the Secretary of State is exactly the same application for both corporate forms. The later just being an election with the IRS. However, that does not preclude an LLC structure.

If the LLC structure is preferred, then it is possible to "privately place" membership issues with investors. However, they can only be placed with "accredited investors ONLY". A violation will result in criminal and civil penalties for each and every infraction which includes the mandatory refund of every single penny raised back to ALL investors. It is also extremenly hard to re-sell membership interests as there is no secondary market. But the good news is this type of corporate structure is becoming more common place.

The best thing to do is form a separate LLC for each property management group to isolate liability to sister property managment groups. Then when the REIT is created, the REIT can be a corporation which wholly owns each of the separate property management groups.

Of course, this means no more than a 49% equity interest in each LLC can be "privately placed" in any offerings. But this structure provides built in protections against downturns in the various real estate markets as demonstrated with the current real estate markets. Texas being very strong and stable. With places such as Miami, Florida, California, Vegas, Ohio, NY, Illinoise, being not so good with negative property values.
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