Owning a rental property exposes landlords to many legal risks—from on-site injury claims to disgruntled tenants’ lawsuits. Every business will have different needs, depending on its size, ownership structure, and local laws. The right insurance should provide some measure of coverage. However, many landlords incorporate another layer of business protection by creating an LLC for their rental properties.
What is an LLC?
The abbreviation LLC stands for “limited liability company.” Every LLC offers its owners pass-through taxation and personal liability protection from company debts or other financial responsibilities. However, each LLC will look slightly different since this flexible organizational structure allows for one or multiple owners and day-to-day management by an owner or employee. You can form an LLC by filing paperwork with the local Secretary of State office, but specific requirements vary by state.
What are the advantages of an LLC?
The primary advantage of an LLC is its limited liability feature. Only business assets will be at risk if a tenant, contractor, or visitor files a lawsuit against the rental property. If the owner keeps separate business and personal accounts (and wasn’t at fault due to negligence or law-breaking), their personal property and finances will remain unscathed.
Keeping separate business and personal accounts can also be beneficial when calculating tax deductions. For instance, an LLC’s pass-through taxation makes profits taxable as personal income only instead of incurring the double taxation imposed on other corporate structures. Plus, operating your rental properties under an LLC offers the landlord privacy while enhancing the property’s professionalism and renter appeal.
What are the downsides of forming an LLC?
An LLC requires some cost and effort to create and maintain. To form an LLC, the owner must choose an available business name, complete articles of organization, draft an operating agreement, and pay a fee. Though state laws differ, additional paperwork and fees may be necessary to keep an organization active. Landlords should consult their lenders before creating an LLC for their rental properties. Sometimes, transferring ownership to the LLC could forfeit beneficial interest rates or even call due the remainder of their loan.
Research the laws in your area and discuss with your attorney or accountant whether creating an LLC might benefit your rental business. An LLC requires additional costs and paperwork and can’t protect your personal assets in every situation. However, this business structure’s flexibility and limited liability could professionalize your business while giving your family some well-deserved peace of mind.
About Rentals America
Rentals America provides full-service property management for residential rental properties. Our team is completely dedicated to property management, and we’re here to help landlords navigate the rental market.
