If you own a rental property, someone may have recommended that you convey ownership of the property to a limited liability company (LLC). But is that right for you? LLCs are primarily set up to protect the owner from personal liability relating to the property. Establishing an LLC is done on the state level and each state’s rules vary. While it’s best to know your state’s specific rules, here are some general guidelines to consider about LLCs.
Protect Your Assets
- LLCs can provide personal liability protection. If your property is owned by an LLC that’s properly set up and maintained, a renter (or one of their guests) cannot likely hold you, as the owner, personally liable. Instead, the LLC would be the proper party in any lawsuits, thereby protecting your personal assets, such as your home and personal bank accounts.
- You’ll need to set up an LLC for each property. Ideally, each of your properties should be held in a separate LLC to protect other properties from a lawsuit. For example, the property owned by “123 Main Street, LLC” would not be affected if someone brought a lawsuit against your property owned by “456 Elm Street, LLC.”
- Keep your personal and LLC funds separate. Insurance policies and utility and other bills should be in the name of the LLC and paid with LLC funds. You should set up a separate bank account for the LLC. A failure to keep your funds separate can jeopardize the protections of the LLC. For example, if you use LLC funds to buy personal items, then the LLC could be disregarded and the insulation against liability would be compromised.
- Be sure to speak with legal counsel. Most of the benefits of conveying a property to an LLC assume that the LLC is properly organized and capitalized, and that the corporate formalities are correctly observed. It is important that you discuss the requirements of conveying a property to an LLC with an attorney who’s licensed in the state in which the property is located.
Consider Your Start-Up Costs & Taxes
- There are minimal start-up costs to create an LLC. Most states charge an inexpensive registration fee and some states charge annual fees and/or taxes.
- LLCs generally do not pay any taxes. Instead, income passes to the LLC’s owner, who must pay the taxes. This is often referred to as “pass through taxation.”
Your attorney and financial advisors can provide additional insight on owning property in an LLC. Your property manager may also be able to refer you to a professional for more details.
*The information contained in this article is not intended to be and does not constitute financial, legal or investment advice. Please consult with your tax and legal professionals prior to taking any steps to modify the ownership of any of your properties.