LLC for Property Rentals: Protect Your Bottom Line

Real estate investors spend too much time and money building their property portfolio to risk losing everything; that’s why many choose to form LLCs. An LLC is a Limited Liability Company, which is one of the least complex legal entities you can use to protect your personal assets as a landlord. 

As TRUiC explains, “Since real estate investing involves plenty of capital (i.e., the property) and unique risks, an LLC crucially separates your private and business dealings. Creating an LLC for your rental property business can reduce your liability, minimize your risks, and ensure that your real estate investment keeps running smoothly.” 

If you’d like to secure your bottom line, increase your credibility, and protect your personal assets, we’ll teach you everything you need to know about forming an LLC.

What Are the Benefits of Creating an LLC for Your Rental Property?

The separation of personal and business dealings isn’t the only benefit of creating an LLC. Additionally, this business entity can:

  • Limit your liability. An informally structured business (i.e., no defined structure) makes you personally liable for damages and legal costs if a tenant gets injured and wants to go to court. For example, if your 80-year-old tenant falls on the stairs and breaks their hip, they may sue you for damages. However, if you have an LLC, typically the assets owned by the LLC will be at risk as a result of the lawsuit.
  • Simplify split ownership with a partner or partners. If you’re investing with others, forming a multi-member LLC means you don’t have to issue stock, hold annual meetings, or keep written minutes to preserve the liability shield afforded to its owners like other business entities, according to Ward and Smith.
  • Increase your credibility. Operating a successful LLC builds your business credit, which means securing future funds will be easier. Also, your LLC will have its own credit report, and any credit inquiries or loans taken under the LLC won’t impact your personal credit history.
  • Unlock tax benefits. If you form a single-member LLC, you’ll file taxes as a sole proprietor and report business income and expenses on a Schedule C form, attached to your Form 1040. If you form a multi-member LLC, you’ll need to file Form 1065. However, unlike other business entities, LLCs allow pass-through taxation, meaning you don’t have to pay taxes on both the business’ and the shareholders’ tax returns when profits are distributed. Instead, “the company’s revenues and expenses “pass-through” to the business owner’s tax return, where the owner pays tax on profits or deducts losses along with their other personal income and expenses,” Legal Zoom says.

Drawbacks to Forming an LLC

Before making any business decisions, it’s important to understand both the pros and the cons of your strategies. When it comes to forming an LLC, be aware that:

  • You’ll have to pay a setup cost in addition to yearly administrative and regulatory fees to maintain your business (we’ll explore approximate pricing later).
  • You’ll need to operate the LLC’s activities as a completely separate entity with a separate bank account (along with a separate accounting system). 
  • Operating under an LLC can make financing your next property a bit more challenging and costly than securing an individual mortgage. As Columbia Property Management points out, you’ll likely be required to get a commercial loan instead of a traditional mortgage, which often requires a larger down payment and a shorter term. 

Although forming an LLC is a fantastic way to protect your assets and shield you from liability, it’s important to note that you will be taking on liability risks as an LLC owner. Specifically, Nolo notes that you take on:  

  1. personal liability for your LLC’s debts
  2. personal liability for actions by LLC co-owners or employees related to the business
  3. personal liability for your own actions related to the business
  4. the LLC’s liability for other members’ personal debts

With that in mind, forming an LLC offers more benefits than drawbacks for many real estate investors.

A landlord considers forming an LLC

How to Create an LLC for a Rental Property

Forming an LLC doesn’t have to be painful, and you don’t need a lawyer or a ton of money to make it happen. For an even easier process, hire the experts at Northwest Registered Agent. All of their orders are processed the same day, meaning you don’t have to wait long for your business to be filed and active. Also, their Corporate Guides are professionals who specialize in your state’s filing – for as low as $39 + applicable state fees.

But if you’d prefer to put your nose to the grindstone and do it yourself, Northwest Registered Agent has shared seven steps to make your own LLC:

  1. Designate a registered agent. Your registered agent must be available to accept your LLC’s state and legal mail at a physical address in the state, like a registered office. If you act as your own registered agent, your name and address will become part of your LLC’s permanent public record. Using a registered agent service keeps your personal information private.
  2. Name your LLC. Create the perfect name, but be sure it’s not already taken by searching your state’s online database.
  3. File the LLC state form. Also called the Articles of Organization, these documents are usually processed by your Secretary of State. The requirements vary, but plan to include your LLC’s name, your registered agent, and a signature. There are companies that do this part for you, too.
  4. Obtain a Federal Tax ID Number. Also called an Employer Identification Number (EIN), you simply have to fill out this free application from the IRS. Once you score your EIN, go to the bank and open an account in the LLC’s name. Remember: you must maintain financial separation between your personal and business accounts to benefit from your LLC’s liability protection.
  5. Write an LLC operating agreement. Your operating agreement governs your LLC, from how it’ll distribute profits and losses to who owns what percentage of the company. As Northwest Registered Agent notes, you don’t have to file this document with a state agency – but you shouldn’t be caught without it.
  6. Fund your LLC. Empty coffers don’t do your business any good, so add your funding to the LLC’s new account.
  7. File state reports and taxes. Your state may require you to confirm your business operations with a renewal or report on an annual or biennial basis. There may be additional requirements, depending on your state.
  8.  

Is It Too Late to Create an LLC if I Already Own Property?

Absolutely not! It’s completely possible to form an LLC, even if you’ve already purchased the rental property. You’ll simply need to:

  • Transfer the title to your new business entity
  • Speak with your original mortgage lender (and be prepared to pay closing costs, new loan origination fees, and a higher interest rate) 
  • Alert tenants that the property is now owned by your LLC
  • Pay a Title Transfer Tax if it’s triggered when converting the property ownership

Pro Tip: To share the news with your tenants, send them an email, letter, or text message with the name of your LLC and have them sign a new lease reflecting the LLC’s ownership of the property. Lastly, be sure to let anyone who pays monthly rent with checks know that each payment must be made out to your LLC moving forward.

How to Transfer a Rental Property Title to Your LLC

Though the LLC formation process may seem intimidating, completing this work upfront means your property will be set and your assets will be protected for years to come – so it’s well worth the time and money! Luckily, everything you need to do is fairly straightforward, and we’ve provided step-by-step instructions to help you along the way.

According to LegalZoom, there are eight steps you’ll need to follow:

  • Contact your lender. Some mortgages have a “due on sale” clause, meaning a transfer of ownership could require you to pay the balance in full. Talk to your lender and ensure they’ll allow you to transfer the property title to an LLC that you own if you remain fully responsible for the mortgage.
  • Form an LLC. Leverage the experts at Northwest Registered Agent, and you can protect your assets in just 10 minutes.
  • Get an Employer Identification Number (EIN) and open a bank account. Fill out this free application from the IRS, and you should have your EIN in minutes. Then, go to the bank and open an account in the LLC’s name. 
  • Secure a deed form. Deed requirements vary from state to state. There are two types of deeds: warranty deeds and quitclaim deeds. Warranty deeds guarantee that the title is good and free of any claims from third parties; quitclaim deeds just pass any interest the holder has in the property without guaranteeing that the title is good (or even in your possession). Look up your local requirements to determine which type you need to use.
  • Complete the Deed form. As LegalZoom highlights, “you are the grantor and your LLC is the grantee.” Fill the form out with your name as it’s written on the current deed and the full legal name of your LLC. If there’s no money being exchanged, consult your county recorder or local laws to determine the minimum consideration required for the deed’s validity. 
  • Sign the deed to transfer the property to your LLC. Your state may require that you sign the deed in front of witnesses or a notary. You may also need the grantee to sign, meaning someone might need to sign on your LLC’s behalf.
  • Record the deed. This step creates a public record of the property transfer. All you need to do is submit it to your local registrar or other agency that maintains your county’s real estate records.
  • Change your lease. Amend your existing lease agreement(s) to reflect that your LLC is now the landlord. Rent should be paid to your LLC and deposited into the separate bank account you created in step three.

Did You Know? Experts disagree on which type of deed is best for transferring a real estate title to an LLC, but a warranty deed offers the LLC some resolution if there is a title problem by preserving the chain of title to the property. 

A beginner real estate investor

Should I Have an LLC for Each Property?

Many experts believe that there are significant benefits to having an LLC for each property you own. As Columbia Property Management points out, “all assets of an LLC are at stake if a lawsuit should arise. Therefore, if multiple properties are held by one LLC, all the properties owned by that LLC are at stake, even though the owner’s personal assets are not.” 

For example, let’s say you have three properties in your portfolio and each property is owned by a separate LLC. If your tenant in property A gets hurt and sues you, properties B and C (along with any assets they hold) are safe from the lawsuit’s impact.

The Cost of Making an LLC

The cost of forming an LLC will vary from state to state. However, you can expect to pay:

  • An LLC filing fee ($50-$3,000)
  • LLC name reservation ($10-$50)
  • Minimum annual LLC or franchise taxes, depending on your state ($100-$800)
  • Annual report fees ($20-$100)
  • Registered agent fees ($100-$300)

Bear in mind that most if not all of these costs are tax deductible, so be sure to keep your receipts!

Bottom Line

Forming an LLC for each rental property you own is an investment in your business’s security that can’t be matched. To simplify the process, trust the experts at Northwest Registered Agents. 

For as low as $39 plus applicable state fees, their specialists will set up your LLC. In other words, Northwest Registered Agents and TurboTenant can help you secure your assets, formalize your business, and increase your credibility in just a few clicks for less than it costs to go to a fancy dinner.

Disclaimer: TurboTenant, Inc does not provide legal advice. This material has been prepared for informational purposes only. All users are advised to check all applicable local, state and federal laws and consult legal counsel should questions arise.

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