Form LLC in TN or GA for vacation rental in TN when GA resident

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SennaMiller

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We are looking at purchasing an overnight vacation rental cabin in Tennessee for the purposes of making a yearly revenue stream and hopefully capital appreciation of the real estate over the years. We are Georgia residents and plan on managing the rental from our home in Georgia (advertise, communicate with potential renters, accept rental payments and received signed rental contracts, pay espenses, communicate with a local cleaning/maintenance company in TN to take care of the property).

Question: Should we just create a TN LLC since the physical property is in TN or would it be better for us to create a GA LLC, then we would also need to register in TN as a foreign company doing business in TN (which costs an additional $300). Based on my research, running the rental business from GA would not require us to register the TN LLC as a foreign company doing business in GA since we would not physically provide services or goods in GA. Any pros/cons to either? Our CPA advised us to creat the GA LLC and register as foreign company in TN since this would allow us to use the GA court system in the case of litigation without having to travel to TN for potential court cases. Would this be the only advantage? Any thoughts?

From our perspective, seems like just creating a TN LLC would be less expensive and less complicated. Since the physical part of the business (the actual rental property) is located in TN, we either need to be a TN LLC or if GA LLC we would need to register as a foreign entity conducting business in TN. We just don't know the legal advantages or disadvantages? We want to use the LLC to protect our personal assets in the case of lawsuit by a renter, but we don't know if TN or GA has better LLC laws with regard to the "shield" from litigation so that lawsuits could not go after our personal assets.

Thanks in advance to any feedback...
 
Your CPA makes some good points and frequently it is about tax and administrative purposes.

With regard to litigation, the information you received is partially correct. Having a corporation in GA doesn't mean you cannot be sued in TN. Chances are that you may have to do the suing if you are renting the property and your incorporating in GA doesn't govern over a TN resident renting a property in TN. It wouldn't make sense to force a TN user to travel to GA to litigate a dispute about a property located in TN and signed by the tenant in TN. If the agreement was made in TN (for example by a rental agent or by yourself) after the tenant viewed the property, there may be jurisdiction for the renter to sue you based upon the fact that the property in TN allows courts there to have jurisdiction over you in the event of a dispute. I wonder if there are residential housing laws that might provide additional tenants rights and prevent you from contracting away the rights of a tenant to litigate issues in TN. I've never had to deal with such an issue when I practiced some landlord tenant law since it was always clear that the New York City Housing Court had jurisdiction to hear disputes in NYC. In addition, if you ever had to evict a tenant the process would be impractical even if you could sue in GA. I'm not saying this for certain but I don't think you'd get the jurisdictional benefit and not sure if you can contract those rights away either, especially for residential real estate.

Regarding protection from personal assets, yes, the LLC should provide you with such. Best of luck with your purchase.
 
More info on rental property that may clarify issue...

thelawprofessor,
Thanks for your response & info. Here is a little more detail regarding the rental property which may help clarify the situation.
The property in TN is an overnight vacation rental cabin, so we advertise the property over the internet (VRBO.com). Renters contact us and subsequently sign (at their home) a 5-page contract we have written up and return that with a rental check to us. We live in GA and administer the cabin from our home in Atlanta. Our renters typically stay from 2 to 7 nights since it is a vacation rental and they come from many different states. We have a clause in the contract that reads:

f. In the event of a financial dispute with the tenant (possibly due to unpaid damage assessments or stolen property, as examples), the tenant agrees that they will be subjected to the jurisdiction of the Magistrate Court – Small Claims Division of Fulton County, Georgia. The tenant agrees to any required travel and lodging for court dates without any compensation. Owners will seek direct payment from the tenant in financial disputes and will result in court mandated payroll garnishments if necessary.

I had copied this clause from another person's contract we found on the internet. I know this just mentions small claims court and it would probably not even be valid for a civil suit (such as if a renter gets hurt on the property, such as falls down the stairs), but from what we understand, the small claims court cases are the most likely to occur in the case that a renter does damages or cabin contents are missing and they refuse to reimburse us for these losses.

OK, now that I have explained a little more detail on our situation, if the rental property is owned by a TN LLC, would that mean that we would have to go to TN small claims court for Sevier County for small claims litigation? If there were ever a civil case (such as a person is injured on the property), would it automatically also imply that the case would have to be heard in TN? Could a renter sue us from their home state (such as Ohio) and force us to travel there for court cases? Is there any verbiage I can place in our rental contract that would help ensure that court cases could be heard in GA or TN and avoid us having to travel to another state (the renter's home state)? If they are suing a TN LLC, does that mean that they have to do that is TN? Would that be a good reason for incorporating the LLC in GA and just registering in TN as a foreign entity doing business in TN? I know... lots of questions, but just trying to cover our bases and make sure that we are getting the full protection of the law. If you would like to see the full rental contract, I can post that if needed...
 
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