Should a Landlord Create an LLC for Rental Property?
Generally, most landlords would benefit from managing their properties under the limited liability company (LLC) business structure. An LLC combines the limited liability of a corporation with the flexibility and pass-through tax advantages of a partnership. Also, the organizational flexibility affords landlords and other professionals a great advantage over many other business forms.
Why Should a Landlord Consider Forming an LLC?
The LLC business structure provides many benefits including …
1) Liability Shield: Limiting personal liability is typically one of the most important goals for a landlord. An LLC, when proper steps are taken to keep the liability shield in place, helps to ensure that personal assets are never attacked.
2) Keeping Rental Properties Separate: Another benefit of the LLC is that it is relatively easy to create individual LLCs for each rental property. Creating individual LLCs for each property helps to insulate each property from separate liability claims.
3) Tax Advantages: LLCs are taxed like partnerships which essentially means that LLCs do not pay income tax. Each member reports its share of the LLC’s income, loss, deductions, credits, etc., on that member’s tax return. Each member must pay tax regardless of whether the LLC distributed any cash during the year.
4) Easier Management of Business and Personal Expense: LLCs should have their own bank account and fixed assets. By decoupling personal and business assets, landlords generally find that the business becomes simpler to operate.
5) Simplify Business Succession or Estate Planning: Selling or transferring ownership when you pass can simplified with the creation of an LLC. This can be accomplished through a well drafted succession plan in the operating agreement or putting the LLC interests in your estate plan.
When is the Right Time for a Landlord to Create an LLC?
The good news is that an LLC can be created before or after you purchase your rental properties. However, creating the LLC prior to buying the property does simplify the process as LLs don’t have to worry about transferring title to the LLC which can add additional steps with the lease, mortgage holder, or title insurance companies.
If you are a current landlord who would like to learn more about the benefits of an LLC or a new landlord who is thinking of purchasing your first property, it is recommended that you contact an experience business and real-estate attorney to properly setup all aspects including the creation of LLC, Lease, operating agreement and all other details.