LLCs are a popular business structure with rental property owners, but they may not be the right choice for you. We’ll go through the benefits, drawbacks and possible alternatives.
What Is an LLC?
An LLC (Limited Liability Company) is a business structure that protects owners from being held personally liable for the repayment of debts or liabilities. Once formed, the LLC will act as the landlord rather than one individual owner.
Someone falls off the roof of your property and breaks their back. They may sue you to pay for medical expenses and more. If the amount exceeds what your business insurance policy covers, the LLC will protect your personal property.
However, remember that an LLC is not a magic cloak of protection—you can still be held personally liable in some situations.
A landlord is frustrated with the tenant and wants them to move out. They move their belongings outside and change the locks in an illegal self-help eviction. The landlord, not the LLC, would be held liable.
Who Should Create an LLC?
Anyone considering renting out a property should consider an LLC structure, as it offers much of the same protection as a corporation.
There are over 3.6 million eviction cases filed in the U.S. every year, not to mention cases of discrimination, warranty of habitability, personal injury, and more. So, there is a real chance you could experience a lawsuit in your lifetime. Without an LLC, you are putting your personal property (houses, cars, cash) on the line.
Should You Use an LLC For Your Rental Property?
Here are some advantages and disadvantages of forming an LLC:
| Advantages | Disadvantages |
| Separation of personal and business accounts | Additional expense |
| Protect your personal liability | Property financing issues |
| Tax Benefits | Difficult taxes |
| Privacy/anonymity | Extra paperwork |
Advantages of Using an LLC For Your Rental Property
There are many reasons why property owners choose to form an LLC for their rental property investment business.
Separation of Personal and Business Accounts
All finances must be kept separate between the LLC and personal funds, or protections offered by the LLC may be void. However, this is actually a benefit.
Keeping business expenses separate from personal finances is extremely helpful when it comes to doing your taxes, especially if you want to take advantage of some of the special deductions that an LLC offers. Keeping separate bank accounts and separate logs of financial spending makes tracking those deductions much easier in the long run.
Protect Your Personal Liability
Lawsuits made against an LLC only affect property that the LLC owns.
If the property is managed by an owner without the use of an LLC or other company, the owner’s personal property (including other rentals) can be seized.
However, if the owner is part of an LLC, only the property that the LLC owns can be seized. The owner’s personal funds and property cannot be affected by the lawsuit.
A tenant in a rental property calls in a work order to have the balcony fixed. In the time it takes for the landlord to call someone and arrange for it to be fixed, a friend slips and falls off of the balcony. The tenant may be able to sue the owner for a large amount of money.
Tax Benefits
LLCs offer pass-through taxation. This means that the taxes are “passed through” the LLC to the business owners. Corporations often pay double taxation as the corporation itself is taxed, as well as the member. Single-member LLCs are taxed like a sole proprietorship.
If you have multiple members in your LLC, income (and taxes) are split between the members. Taxes will be filed through the IRS with a Schedule C, Schedule K, or Form 1065. LLCs also have the option to be taxed as an S Corporation or C Corporation.
Again, it’s important to discuss your company structure and tax plan with a professional to determine what is best for your LLC.
Anonymity
An LLC gives the property owner a certain amount of anonymity. The property will be listed under the ownership of the LLC instead of a name that may divulge personal information. Though it is a small benefit, it is useful for those who want to be cautious about their personal information.
If an owner operates without an LLC, the tenant will always know exactly who owns the property. This may not seem bad, but it can be a nig htmare if a tenant has bad intentions.
Disadvantages of Using an LLC For Your Rental Property
While creating an LLC has many benefits, it also has quite a few disadvantages that make it a less advantageous option for some property owners.
Additional Expense
Creating an LLC can be expensive. The cost to file an LLC ranges from $35 to $300. Plus, you must also factor in lawyer fees (if you use one), taxes, and other fees that must be paid to maintain the LLC. Many LLCs also pay a registered agent and tax professional.
The ongoing expense with the property expenses may be too much for rental owners with slim margins.
Property Financing Issues
It can be difficult to transfer a property you already own into an LLC. It is especially difficult to transfer a property into an LLC if you have an open mortgage on it.
Transferring ownership to your LLC may be considered a formal ownership transfer, and you could lose your lower interest rates. If you don’t speak with your lender beforehand, you may also cause your entire loan to be called due while trying to transfer.
Difficult taxes
Many owners choose an LLC for its tax benefits and flexibility, but that doesn’t mean they are simple to file. The tax requirements vary by state and depend on which type of LLC you form (single member, partnership).
There are typically a few forms to fill out, and your state may have others. If you have multiple members or employees, it’s probably best to consult a tax professional.
Extra Paperwork
Landlords already have a lot of tasks to keep up with. From property maintenance to advertising to fill a vacancy, there may not be much extra time for additional paperwork.
Creating an LLC can take several weeks, as you will need to choose a business name, complete the articles of organization, and craft an operating agreement. In addition, the standard LLC processing time typically takes 2-3 weeks but varies by state.
Alternatives to an LLC for Rental Properties
Some real estate investors opt to form other types of companies for their rental properties. While there are no alternatives that do what an LLC does, these options may be better suited for your needs.
Check out this table for a list of benefits and drawbacks compared to an LLC of each of these company types:
| Company type | Benefits | Drawbacks |
| Sole Proprietorship |
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| Real Estate Trust |
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| S Corporation |
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| C Corporation |
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| General Partnership |
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| Limited Partnership |
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When Should I Start an LLC for a Rental Property?
It is best to start your LLC before you purchase a rental home. This can help alleviate lender issues that arise when trying to transfer your property title to an LLC. It will also keep you from having to update and resign current leases.
However, if you already own an active rental, you’ll still want to form your LLC ASAP. If you are sued before your LLC is approved, the title is transferred, a separate bank account is made, or you update leases, your assets are at risk.
You should also weigh the risks of waiting to create an LLC if you start the process in the last 2-3 months of the year. For example, if you formed your LLC in December, you would be required to file two separate tax reports (one for January – November as a sole proprietor and one for December as an LLC).
Should I Have Multiple LLCs?
Creating multiple LLCs is not legally required. However, many owners prefer to keep their properties separate. Multiple LLCs allow for:
- Reduced liability – You can only be liable for the assets in each LLC.
- Increased tax benefits – Each LLC can have its own tax structure, which can help decrease tax spending by allowing you to determine which structure is most efficient for each property.
- Flexible management structure – You can also vary the structure of each LLC you own. Some may have multiple members, while others can be a single member.
How Much Does it Cost to Form an LLC?
State laws require all business owners to pay a filing fee to form an LLC. The cost varies by state. Check out the list below for the filing fee in your state:
| State: | LLC Filing Fee |
| Alabama | $200 |
| Alaska | $250 |
| Arizona | $50 |
| Arkansas | $45 |
| California | $70 |
| Colorado | $50 |
| Connecticut | $120 |
| Delaware | $90 |
| Florida | $125 |
| Georgia | $100 |
| Hawaii | $50 |
| Idaho | $100 |
| Illinois | $150 |
| Indiana | $95 |
| Iowa | $50 |
| Kansas | $160 |
| Kentucky | $40 |
| Louisiana | $100 |
| Maine | $175 |
| Maryland | $100 |
| Massachusetts | $500 |
| Michigan | $50 |
| Minnesota | $155 |
| Mississippi | $50 |
| Missouri | $50 |
| Montana | $35 |
| Nebraska | $100 |
| Nevada | $425 |
| New Hampshire | $100 |
| New Jersey | $125 |
| New Mexico | $50 |
| New York | $200 |
| North Carolina | $125 |
| North Dakota | $135 |
| Ohio | $99 |
| Oklahoma | $100 |
| Oregon | $100 |
| Pennsylvania | $125 |
| Rhode Island | $150 |
| South Carolina | $110 |
| South Dakota | $150 |
| Tennessee | $300 |
| Texas | $300 |
| Utah | $54 |
| Vermont | $125 |
| Virginia | $100 |
| Washington | $200 |
| West Virginia | $100 |
| Wisconsin | $130 |
| Wyoming | $100 |
Keep in mind that most states have additional annual or biannual fees that must be paid to keep your LLC active. Additional fees typically range from $0 to $800, with an average of $100.
How Do I Set Up an LLC?
To create an LLC, you must file with the Secretary of State’s office in your state. However, remember that creating an LLC isn’t just filing one form. Several steps must be taken to create an LLC, including:
- Talking with your lender
- Choosing an LLC name and registering it
- Finding a registered agent
- Filling out and filing The Articles of Organization
- Crafting an Operating Agreement
- Dividing personal and business assets
- Transferring your title
- Updating existing rental leases
