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Should You Create an LLC For Your Rental Property?

What is an LLC?

A limited liability company (LLC) is a business structure. You can create an LLC by yourself, with a partner, or with a group. If you own an LLC you are a “member” of the LLC.

LLC’s are regulated at the state level, so the process of creating an LLC will differ state-by-state. This article will provide an overview of benefits of creating an LLC and how to create an LLC. We strongly recommend doing state-specific research to further understand how to create an LLC in your state (and the specific fees and costs).

What are the Benefits of Creating an LLC?

There are four benefits of creating an LLC for your rental property.

  1. Limit Your Personal Liability: If you own your property as an individual and someone files a lawsuit against you, then your personal assets are at stake. However, if you create an LLC, then the only assets at stake are those owned by the LLC. In other words, your rental property is the only asset at stake and not your personal finances.
  2. Keep Your Rental Properties Separate From Each Other: In addition to separating the rental property from your personal assets, you should also separate your rental properties from each other. If you own multiple properties, you can “insulate” each property from liability claims by setting up separate LLCs for each property. If you have all of your properties under separate LLCs, then if someone files a lawsuit pertaining to one of your properties, then the rest of your properties will not be affected by the lawsuit. This effectively separates and protects each of your properties.
  3. Pass-through Taxation: Pass-through taxation is a benefit of individual-owned businesses. Normally, a corporation is taxed directly on its profits and owners are taxed again when they make income from their business. With an LLC, you get the benefit of the company’s income “passing through” to you as the business owner. Essentially, all income made by your LLC (your rental property) will flow through to your individual income tax return. This minimizes the amount of money taken out of your income for taxes.
  4. Easily Separate Business and Personal Expenses-When you create an LLC, you should create a separate bank account for your LLC. That way, your personal expenses are separated from business expenses. This makes it easier to claim business expenses when it comes time to do your taxes. It will be visually clear to you when you check your bank statements which expenses are business and personal.

Who Should Create an LLC?

Any landlord can benefit from creating an LLC. Whether you have one property or several, you will benefit from pass-through taxation and protecting your personal liability.

LLCs can be especially helpful if there are multiple owners of a property. When you create an LLC, you’ll create an operating agreement that outlines the rights and responsibilities of each member of the LLC. This can help you seamlessly manage the property and protect each member of the LLC in case of legal trouble. (https://www.avail.co/education/articles/should-you-create-an-llc-for-your-rental-property)