If you’re researching different real estate investing strategies and considering delving into the world of managing rental properties, chances are you’ve probably stumbled upon the pros vs cons of setting up an LLC for a rental property.
If you’re new to setting up a business, the idea of an LLC (and how to set one up for your rental properties) might seem overwhelming. However, it can be done very easily. Additionally, setting up an LLC for rental property isn’t always necessary for owning and managing rental properties, but can be beneficial for your real estate business.
What is an LLC?
LLC stands for “limited liability company”.
As a business structure, it offers key advantages that both partnership and corporations have access to (U.S. Small Business Administration). Primarily, an LLC shields your personal liability and assets (your personal bank accounts, home, car, etc) from being used as financial assets in a court of law. This is in case you ever find yourself a party in a lawsuit as the result of your rental property business.
An LLC protects your personal assets and distinguishes your rental property business as its own asset. BUT, you still receive the benefit of being able to avoid corporation taxes with pass-through taxation (more on that below).
Benefits of LLC for Rental Property
As touched on above, there are several benefits that an LLC for rental property can provide landlords.
Protects Personal Liability
One key benefit for setting up an LLC for rental property investments is to mitigate your personal liability in the event of a lawsuit. This means that if you have the unfortunate situation of being sued, your LLC (and not you as a person) can be named a defendant in the case.
Protects Personal Assets
Another major benefit is the protection of your personal assets being used in courts. Essentially, an LLC for a rental property protects your personal assets (like your bank account, home, and car) against lawsuits.
Insurance is another great way to offer protection from this type of liability as well. Every landlord, for example, should have landlord insurance that covers them in the case that a tenant or guest of the tenant is injured on their rental property.
If you’re unsure about the pros vs. cons of forming an LLC for rental property, you should be sure to ensure your insurance coverage offers personal liability & asset protection.
Provides Tax Benefits
If you have an LLC set up for your rental properties, you are able to add profit & losses under your personal taxes vs filing as a separate entity as a result of pass-through taxation.
Pass-through taxation means that you as a business do not have to file a separate tax return because it will be reported on your personal income taxes as an LLC is considered as a sole proprietorship and can typically avoid the corporate taxes and regulations (LegalZoom).
Cons of LLC for Rental Property
- Set up fees for creating the LLC initially
- Filing paperwork to form the LLC for rental property
- Annual fees for maintaining the LLC
- Creating multiple bank accounts for multiple LLCs
If you do set up an LLC, you’ll have to set up separate bank accounts for each LLC (if you have more than one property). Fortunately, RentRedi makes it easy to set up property-specific bank accounts so that you’re able to do this quite easily!
This is also important because if your main objective in setting up LLC is to protect personal assets in the event of a lawsuit, you’ll want to ensure that each property is its own separate LLC to prevent its assets from being able to be claimed.
How to Set Up An LLC for Rental Property
As always with landlord tenant laws, rental properties, and structuring a business—the exact steps you need to take to form an LLC for rental property will vary state-to-state.
It is highly recommended that you consult rental law and legal counsel in your state to ensure that if you choose to set up an LLC for rental property that you are legally compliant with your state’s laws!
- Consult your legal counsel. They will be able to help you determine if creating an LLC for your rental properties is right for your business and can make sure you follow all the necessary steps/.
- Decide on a business name & register it. You’ll need to choose a business name that’s unique to your business to register. To register your business, you’ll also need to provide documentation called “articles of organization” and an “operating agreement”. Articles of organization provide the basic information of your business (i.e., business name, address, etc). An LLC operating agreement “describes the structure of your company’s financial and functional decisions” (U.S. Small Business Administration).
- Get an EIN. The state and federal tax ID numbers you will need for an LLC for rental property are called Employer Identification Number (EIN). This number works similarly like a personal social security number, but for your business.
- Open a business bank account. You’ll need to separate out your business expenses & finances from your personal to stay legally compliant. If you’ve registered a rental property as an LLC, you’ll need to make sure any incoming rent from that property is collected in a business bank account connected to that LLC.
Disclaimer: This content is not intended to substitute, replace, or be construed as professional legal advice. It is for referential purposes only and not meant to replace the advice of your legal counsel, legal representation, and or lawyer. Please consult your professional legal representation or lawyer to ensure you are compliant with any local, state, and/or federal laws.