An LLC or Limited Liability Company has become a very popular business structure for rental property owners.
You are considering creating an LLC for your rental but don't know whether it is the right way to go. Here's what you need to know about your options and how to decide if this is the best choice for you.
In order to meet the legal needs of every form of a rental company in real estate investing, LLCs are a popular choice for real estate firms; however, the entity does not satisfy every type of rental company's legal requirements.
What is an LLC?
First let's answer what is an LLC: a set of business entities that provide owners with the benefits of limited personal liability and tax treatment as a partnership are considered LLCs.
The key benefit for real estate companies is because the owners have liability insurance, the entity cannot be sued unless there is proof of wrongdoing or negligence.
The 4 Benefits of Creating an LLC for Your Rental Property
There are four advantages to forming an LLC for your rental property:
1. LTD Personal Liability Protection
When you are the sole business owner of a rental property, you are personally responsible for anything that happens on your property.
With an LLC, there is liability insurance against personal financial liability in case someone gets hurt or has their property damaged while on your rental property.
A rental property owner cannot be held accountable unless there was wrongdoing or negligence, according to documentation from the SBA.
2. Maintain a clear distinction between your rental properties and personal assets
If you own multiple properties, you need to separate your rental companies from your personal assets.
For example, if you have an LLC set up for one property, but not another, and tenants identify your company as the owner of their rental home, they could sue both properties if something goes wrong.
That means that any money in your personal bank account could be at risk. You need to form an LLC for each rental property in order for that distinction between your personal and business assets to be clear.
When you own a rental company as a sole proprietorship or general partnership, you can be held personally responsible for any legal problems that arise.
3 . Tax protection (Pass-Through Taxation)
LLC status protects you from personal liability, but it also can help with your taxes.
You may enjoy limited tax responsibility if you are single-member LLC, but the rules vary depending on different circumstances.
With an LLC, there is limited tax responsibility for your rental business because the profits and losses from the LLC flow directly through to you as a personal tax return.
4. Separate your rental properties from each other
Separating your rental properties is another benefit of forming a separate LLC for each property. Just like you do not want to mix your personal and business finances, you also do not want to mix or co-mingle your rental homes or other properties' business expenses with each other.
When it comes time to sell one of the rentals, potential buyers will want proof that the property they want to purchase is free and clear from any liens or other claims.
Drawbacks of Creating an LLC for Your Rental Property
While LLCs offer many benefits, as a property owner, you should know that there are some drawbacks as well.
1. You must pay an additional fee to set up and maintain the business entity.
You may also want to consider how limited liability will work with family landlords who want to transfer investment property within their own family.
For those with larger holdings, the annual fees for LLCs can get expensive, and if you plan to leave your rental property business to family members, you may want to keep the ownership in the family instead of setting up an LLC.
2. Real estate investors sometimes find LLCs too restrictive for their needs.
You cannot sell shares in a limited liability company, which can make it difficult to transfer ownership.
Whether or not you want to create an LLC for your rental property is a personal decision, and there is no right answer. You will need to weigh the benefits against the drawbacks and decide if taking on the extra cost and responsibility of an LLC is worth it for you.
Other Things To Consider
If you do decide to create an LLC for your rental property, there are other things that you will need to do in order to protect yourself.
1 . Maintain a separate bank account for your rental company
You should never put money from one property into the account for another because you could be risking the security of all of them.
If one tenant decides to sue your company, the money in all of your accounts could be considered fair game.
When setting up an LLC for rental property, speak with a real estate attorney who can help you understand how this business structure will work for you and what you need to do to protect yourself.
With so many issues, including taxes (franchise or title transfer tax), liability, and property ownership, you want to make sure that you are doing what is right for yourself and your family.
2. Make sure to get separate licenses and permits
Although this should be done in any case, it is even more crucial when your rental properties are in different states or cities. If you have a federal tax ID number for your LLC, you will need to notify the Internal Revenue Service every time you move an address.
You will also have to report this change to all of your local government agencies so that they have the correct information on file.
3 . Know what not to do if you are setting up an LLC for rental properties
Before forming an LLC for your rental properties, consider what you should not do. While the separate entity protects you from some liability and responsibility, it also can make taking care of business more difficult.
If you need to file a permit or request a license from your city or state government, it will require that all of your LLCs have individual names.
This means that you will have to come up with a different LLC name for each property. In some cases, this can make things more complicated and may not be possible due to the naming requirements of your city or state.
Even if you use an LLC for rental properties, there are still benefits to filing as a real estate investment trust.
At first glance, you might think that filing as a real estate investment trust will only benefit those who have multiple properties, but this is not the case.
Whether or not you own multiple properties, if you are considered to be an active investor, then taking advantage of certain tax benefits before you sell your property can put more money in your pocket.
How Do I Create an LLC for a Rental Property?
Creating an LLC for your rental property is a fairly simple process, but you will need to make sure that you follow all of the rules set forth by the state where you are filing.
You will also need to decide which type of business structure works best for your needs.
Once you have made these decisions and established an LLC, it is important to make sure that all of your records are correct.
Starting a business is an exciting time, but you will need to make sure that you take the necessary precautions from the start in order to keep yourself and your personal assets safe.
How to Transfer Property Title to an LLC?
When you are setting up an LLC for rental property, one of the first things that you will need to do is transfer the title and deed to your property into the name of your company.
This can be done by contacting your local county clerk's office and completing a form that transfers the title into your LLC's name.
Once you have completed this form, you will also need to fill out the proper documentation with the state.
All LLCs are required to be registered in their state of origin and may require additional paperwork before they can accept your property deed.
Before transferring assets into an LLC, especially real estate, make sure that you understand all of the rules set forth by your city and state.
While you can fill out the paperwork yourself, it is a good idea to have a legal professional review your documents before filing them to increase your chances of keeping your transfer from being denied.
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FAQs
How Much Does a Title Transfer Tax Cost?
The cost of a title transfer tax varies from county to county and will depend largely on the value of your property.
In some cases, you may be required to pay this fee when you file for an LLC formation in the state where you live.
How Do You Name the LLC for Your Rental Property?
When it comes to naming your LLC, you will need to make sure that you follow your state's specific guidelines in order to avoid any unnecessary problems with the Secretary of State.
Can I Live In My LLC Rental Property?
Living in your LLC rental property is not allowed. You either need to hire someone to manage the property, or you will have to rent it out yourself.
Forming an LLC for a Rental Property: Conclusion
In conclusion, while you might think that filing as an LLC to protect your rental property ownership has its drawbacks, there are several benefits that this type of business structure offers.
Depending on your needs, investing in an LLC for your rental property can be a smart idea.
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