The big question – should I create an LLC (Limited Liability Company) for my rental investments? An LLC (Limited Liability Company) is a business that combines various components of a sole proprietorship, partnership, and corporation. It is typically a less complicated business entity than a corporation. It is also relatively inexpensive to create and provides owners a variety of benefits that may not be available to other types of business structures. Let’s discuss the pros and the cons. 

Pros 

1. Perhaps the most significant pro, an LLC easily separates your personal finances and liabilities from your business. If a tenant sues you – for any reason– your personal finances are not at stake. Any judgments can only be made against the rental property. 
2. Pass-through taxes –any income from the LLC will flow through to your individual tax return –the business does not have to file a separate tax return, minimizing the amount of money withheld for taxes. 
3. Creating an LLC for your real estate investment, including an operating agreement, enables you to purchase properties with a business partner –whether he/she is an active partner or merely an investor.   
4. Your LLC will have a separate bank account, making it much easier to track expenses, losses, profits, etc.  
5. If your LLC has multiple owners, there are no restrictions on how the company pays each owner. Expenses for write-offs and reimbursements can be structured individually by preference. 
6. You can contribute assets to the LLC. For example, you can create a loan plan from your personal finances, with reasonable interest and a payment schedule. 
7. You can continue to acquire additional properties within the LLC. The property deed will be in the LLC’s name, but the income flows into your individual tax return, and you still enjoy the advantage of equity gains. 
8. IF your rental properties are your primary source of income, then you can deduct any health insurance costs for yourself and your family.  

Note: Of course, restrictions, guidelines, etc., may vary from state to state. Taking time for state-specific research is critical.   

 Cons 

1. There are set-up costs, regulations, annual requirements, including filing fees, etc. While any business structure will have these, and LLCs are typically less complicated/expensive, some investors still consider this a con and choose to keep to a schedule-C business. 
2. Pass-through income is subject to self-employment tax. 
3. While you have the option of operating one LLC for all your properties within a state, you must have separate LLCs for each state in which you own property. 
4. Unlike a corporation, you are not permitted to raise money by issuing equity shares of your business under the structure of a limited liability company. 
5. While there is a distinct advantage of protecting your personal property from liability, it is not entirely bullet-proof –a judge does have the authority to override the protection if you aren’t diligent in keeping your business books separate from your personal records or are fraudulent in business. (In reality, this is not a ‘con’ of LLCs, but of poor business practices) 
6. A single-member LLC faces the same tax structures as a sole proprietor. While an LLC can be a huge plus for someone with several – or more – properties, if you are a single-member LLC with only one or two properties, you may consider the required paperwork not worth the hassle. 

An LLC combines the advantages of a partnership with the liability protections of a corporation, making it an attractive option for landlords. If you are considering this option, your tax accountant will guide you through the necessary steps. We have also included a couple of links with general information on the process.   

https://learn.roofstock.com/blog/transferring-property-to-llc 

https://www.upcounsel.com/transferring-rental-property-to-llc 

Rentals America is your local property management company. We help you take care of your business.    

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.