How to Form an LLC for a Family Cabin (Expert Tips Revealed)

Delina Chantel Yasmeh
Published by Delina Chantel Yasmeh | Author
Last updated: April 14, 2024
Methodology
We meticulously research and verify the information presented in our articles. By consulting reliable sources and ensuring factual accuracy, we are committed to providing readers with well-informed, trustworthy content.

A limited liability company is commonly used for business purposes, but family property can actually benefit from the same structure.

But if you're going to be running a business out of your cabin, it's important to take steps to protect yourself financially.

As an expert in mergers and acquisitions, I assisted several entrepreneurs in forming and maintaining their limited liability companies.

Together with our team of legal professionals, we’ll provide an in-depth guide on how to form an LLC for a family cabin.

Quick Summary:

  • Forming an LLC for a family cabin entails the same requirements, procedures, and associated fees involved in launching a conventional limited liability company. 
  • There are two main reasons to form an LLC for a cabin: if you intend to convert it into a rental property and to establish a transfer of ownership, use, operation, and maintenance within the family.
  • According to Shelterforce data, the percentage of rental units owned by non-individual investors, including LLCs, increased from 17.3% in 2001 to 24.5% in 2015, indicating a significant trend towards organized property management.
  • I remind property owners to consider forming an LLC if they have multiple estates maintained as rental businesses.

Steps to Form an LLC for a Cabin

1. Choose a Suitable Business Name

Choosing an appropriate business name is an essential first step in forming an LLC. The name should accurately represent the cabin and align with the intended purpose of the LLC.

It is interesting to note the significant variance in the property management industry across the United States, illustrating the importance of location-specific considerations. For instance, as per Iproperty Management data, while Hawaii exhibits the highest number of property managers per capita, nearly three times the national average, Puerto Rico has less than 5% of the national per capita average. This contrast underscores the importance of understanding local market conditions when setting up an LLC.

Once clients’ have identified a potential name, I always conduct a name search to ensure that the chosen title is unique and not already used by another business entity.

2. Determine the Registered Agent

The registered agent will play a crucial role in an LLC by accepting legal documents and official correspondence on behalf of the company.

To qualify as a registered agent, the individual should be of legal age, a resident of the state where the LLC is located, have a physical address, and be available during regular business hours.

The individual can be a family member, attorney, or professional registered agent service.

3. Draft and File the Articles of Organization

The Articles of Organization officially establish the existence of your LLC and outline the following information: 

  • LLC's name and address
  • Names of the members
  • Management structure
  • Registered agent information
  • Purpose of the LLC
  • Duration of the LLC

File the document with the appropriate state agency, usually the Secretary of State or a similar governing body.

Pay any required filing fees and follow the prescribed filing process outlined by your state's regulations.

4. Draft an LLC Operating Agreement

An LLC operating agreement is a written document that outlines the internal rules and regulations of the LLC and includes the following:

  • Ownership interests
  • Management responsibilities
  • Profit and loss distribution
  • Voting requirements
  • Dissolution procedure
  • Decision-making

While not all states require an operating agreement, I remind business owners to draft one since it establishes clear guidelines for operations and management and helps minimize potential conflicts.

5. Obtaining Necessary Licenses and Permits

To operate the LLC legally, you’ll require certain licenses and permits applicable to cabins and vacation properties in the area where your family cabin is located.

These could include permits for family vacation homes or rentals, short-term lodging, environmental licensing, or any other specific requirements set by local authorities.

Cabin properties often require fire and safety inspections to ensure compliance with local fire codes and regulations [1].

Pros Of Forming An LLC For A Family’s Cabin

  • The ownership transfer, rights, shares, and distribution are clearly defined in the operating agreement 
  • The personal assets of the members are protected from any liability that may arise from the rental property 
  • Business earnings are not subject to tax but is passed through to the members' individual income tax return 

Cons Of Forming An LLC For A Family Cabin

  • An LLC entails formation and compliance requirements that involve paperwork, expenses, and management 
  • The articles of organization of an LLC is a matter of public record, which may compromise the privacy of the family

Financial and Tax Considerations

These are the things you’ll take into consideration:

1. Open a Separate Business Bank Account

To maintain a clear separation between personal and business finances, I ensure that my clients open a separate bank account for their LLC to maintain limited liability protection.

2. Understand Tax Implications and Obligations

Understanding the tax implications of forming an LLC for your cabin is crucial [2].

While an LLC is a pass-through entity for tax purposes, the profits and losses of the LLC are reported on the member's individual tax returns.

Additionally, it's noteworthy that the percentage of rental units owned by non-individual investors, including LLCs, increased from 17.3% in 2001 to 24.5% in 2015, as per Shelterforce, highlighting a trend towards more structured ownership and management in the real estate sector [3].

Moreover, according to the Tax Foundation, certain states may impose annual fees or taxes on LLCs, so it's essential to research and comply with any local tax requirements, including property taxes [4].

3. Allocating Profits and Losses Among LLC Members

As an LLC, it's essential to establish a fair and transparent method for allocating profits and losses among the LLC members. The provision is included in the operating agreement.

"Great things in business are never done by one person."

– Steve Jobs, Founder of Apple Inc

4. Seeking Professional Advice from an Accountant or Tax Specialist

Given the complexity of tax laws and regulations, I advise business owners to seek professional advice from an accountant or tax specialist experienced in handling LLCs [5].

FAQs

What Is the Purpose of a Family LLC Agreement?

The purpose of a family LLC agreement is to help protect the family members of the LLC in the event of divorce, death, or bankruptcy.

How Do You Share an LLC Cabin?

You can share an LLC cabin by specifying the rules for ownership of LLC interests in the operating agreement. Every owner should be aware of his or her share of property tax obligations, profits, and losses, among other variables.


References 

  1. https://www.telgian.com/preparing-fire-inspection/
  2. https://www.investopedia.com/articles/personal-finance/071514/using-llc-estate-planning.asp
  3. https://shelterforce.org/2022/08/23/when-landlords-hide-behind-llcs/
  4. https://taxfoundation.org/research/all/state/2024-state-business-tax-climate-index/
  5. https://www.nytimes.com/wirecutter/money/

About The Author

Author
Delina Chantel Yasmeh, J.D./Tax LL.M, specializes in Mergers and Acquisitions at Deloitte and PwC, managing billion-dollar transactions. Educated in Accountancy at California State University and holding advanced degrees from Loyola Law School, she is highly skilled in tax law. Delina also dedicates time to pro bono work for women and children.
Learn more about our editorial policy
Growth & Transition Advisor
LJ Viveros has 40 years of experience in founding and scaling businesses, including a significant sale to Logitech. He has led Market Solutions LLC since 1999, focusing on strategic transitions for global brands. A graduate of Saint Mary’s College in Communications, LJ is also a distinguished Matsushita Executive alumnus.
Learn more about our editorial policy

You May Also Like

Leave a Reply

Your email address will not be published. Required fields are marked *