Should you form an LLC for rental property? The answer depends on how many properties you own and how much money you want to invest in the process.
If you’re just getting started in real estate investing, forming an LLC may not be worth the cost—in terms of both money and time. However, if you own a lot of properties or plan on buying more in the future, then consider taking this step to protect yourself from liability exposure. The purpose of this guide is to explain why it is a good idea to form an LLC for rental property.
An LLC can reduce your legal liability for rental property damage.
As a landlord, you’re responsible for the conduct of your tenants, which can make you liable if they cause damage to your property.
However, by forming an LLC and acting as its manager, you can separate your personal assets from those that belong to the business.
If someone sues you in connection with your rental property, they cannot sue you personally or get a judgment on any of your personal property (including bank accounts). Instead, they must go after the LLC’s assets.
This means that if there is no sufficient asset left after paying off judgments against it, these judgments won’t be enforceable against any of your or other owners’ personal property either.
An LLC allows you to avoid double taxation.
An LLC is a pass-through entity, which means that it’s not taxed at an entity level. Rather, it passes the income and expenses through to its owners, who then pay taxes on their share of the LLC’s income.
The benefit of this arrangement is that there are no double taxes for your rental property—you don’t have to pay taxes on your rental property income and then again when you receive distributions from the LLC. Instead, you’ll simply be taxed on your share of the net profits (or losses).
Of course, you may still want to deduct your share of rent or mortgage payments before calculating how much tax you owe; otherwise, those deductions could be wasted if they’re included in your taxable income but can’t be used by you in calculating what percentage rate applies to them.
An LLC makes it easier to raise capital and get financing.
You may be able to attract more investors and lenders by forming an LLC. Investors are often attracted to investing in limited liability companies because they can hold their interest as a shareholder or member of the company rather than having a direct stake in the property.
This arrangement allows them to avoid being personally liable for losses incurred by the rental property, and it protects their investment from personal creditors if they default on their loans or other debts. Lenders typically prefer dealing with an LLC instead of a sole proprietorship or partnership because they’re less concerned about losing their money if something goes wrong with your business venture.
An LLC can be advantageous if you have a large number of rental properties.
If you own more than 10 properties and are looking to transfer ownership of one or more of them, an LLC may be advantageous. In fact, it’s probably worth it if you own even one rental property and plan on transferring ownership at some point down the line.
A corporation can only hold one class of stock, which means that all shares must be the same type (common or preferred). If you want to be able to transfer ownership in any way other than by selling that whole company—for example, if there is a trust set up for your children or spouse—an LLC allows this flexibility while still protecting their rights as owners of that property. You can also give them voting rights or allow them to participate in management decisions without altering their status as owners.
Forming an LLC is simple, but will cost money.
The cost of forming an LLC is relatively low, but it can vary depending on the state you choose to form in. The average cost of forming an LLC ranges from $50 to $500. However, some states have additional filing fees that increase the overall price tag. For example, Nevada charges $725 while Montana charges $50 in filing fees.
Because forming an LLC requires you to file articles of organization and pay filing fees with your state government agency (typically referred to as the Secretary of State), you must consider both before choosing which entity type to use for your rental property business structure.
Forming an LLC for rental property may be worth it.
If you own rental property, forming an LLC may be worth it. An LLC helps protect you from liability when your tenants fall on hard times and can no longer pay their rent. It also keeps your personal assets safe if the rental property is damaged or destroyed in a fire or other disaster. Most importantly, an LLC can help shield you from double taxation by reducing the amount of self-employment taxes that you pay for income made through rentals.
However, forming an LLC is not without its complications and costs—it requires paperwork to set up the entity and maintain it properly over time. If you’re only planning on owning one or two properties then this might not make sense for your needs; however, if there are several properties involved or even just one that brings in significant revenue then creating an LLC could save money down the road by reducing taxes owed as well as legal fees associated with dealing with any issues that arise while owning real estate there’s no way around paying these costs but they might be lower than what would otherwise happen if things went wrong so keep that in mind before deciding whether or not this is right for yours.
Conclusion
Ultimately, forming an LLC for rental property is a good choice. The key is to set up your company correctly and make sure you have the right insurance coverage in place.
