October 9, 2023
Last Updated
Updated November 2021
Landlords both new and experienced often come to the same point in their career. That is the point when they start to wonder whether or not they should create a landlord LLC (Limited Liability Company) to better manage their rental property.
Most landlords in the rental industry get curious about LLCs because they want to improve the management of their legal and tax liabilities. Can setting up an LLC for your rental business help you handle these issues or is there a better solution?
An LLC for rental property management does have a lot of benefits, but it’s not a fix-all for landlords. Today, learn about what an LLC can and cannot be used for and why you might want to set one up sooner rather than later.
Table Of Contents Of LLC And Rental Property
Offering landlord property services is complicated, and sometimes keeping your responsibilities and liabilities in order goes by the wayside. Can setting up an LLC keep you more organized and professional? Learn more now:
- What Is A Landlord LLC?
- An LLC Protects Your Personal Assets
- How Are Legal Liability And LLCs Linked?
- Are There Tax Benefits To Having An LLC?
- Setting Up An LLC For Rental Property Management
- Set Up An LLC Bank Account
- Comparing: Landlord LLC vs Umbrella Insurance
- Should I Create A Landlord Management LLC?
- Pros And Cons Of LLC For Rental Property Management
- Top Landlord LLC FAQs
- Moving Forward With Landlord Property Management
What Is A Landlord LLC?
An LLC, also known as a Limited Liability Company, is a type of business structure that you can set up as an individual or with other people as a partnership. An LLC is a type of pass-through entity. This means that it is not a corporation. All earnings are “passed through” to the members for them to report on their own taxes. Members must pay self-employment taxes on the amount earned when using this structure.
An LLC Protects Your Personal Assets
LLCs help to protect personal assets in a variety of financial and legal situations that can occur with your rental property. If a tenant gets injured on your property or otherwise sues your LLC, your personal belongings will be protected from the associated risk.
LLCs Don’t Pay Federal Income Taxes
Since LLCs are treated as pass-through entities rather than corporations, all money made through an LLC is not taxed as a federal income in the way an S or C corporation would be. Instead, the taxes are paid on the individual level through a self-employment tax, and you file your taxes as you typically would.
LLCs Differ By State
One thing that you should know about LLCs is that the process of creating one, filing for your paperwork, and paying any necessary costs varies by state. Like many aspects of being a landlord, it will be important to localize any information gained through today’s article.
Make sure to research what you need to do to legally open and operate an LLC in your state. Otherwise, you could end up in confusing legal or financial trouble.
LLCs Separate Finances And Properties
Another useful thing about LLCs is that you can use them to insulate your properties from one other while also separating your personal finances from your rental property finances.
If you own many rental properties or have a rental property with an exceptionally high value, you could set each under its own LLC. This would prevent any legal issues of one property from affecting another.
Having a separate LLC and LLC bank account makes it easier than ever before to organize your costs on the financial front. By utilizing a specific LLC account for managing a property, you will be able to organize your finances and taxes in a simple, straightforward way.
How Are Legal Liability And LLCs Linked?
When landlords think of legal liability, we all think about getting sued by a tenant.
The first thing that needs to be said about the LLC structure is that it does not completely limit personal liability when managing your rental properties.
If you were personally responsible for a neglected job (snow removal, pool maintenance, etc.) that resulted in a tenant injury, you’d likely still be liable as an individual. Also, in situations where a law was broken or you were involved in deceptive business practices, you, not your LLC, would be personally responsible.
Another legal liability to be aware of is not keeping the finances separate.
If the rental is not capitalized enough to cover expenses and you’re paying out of a personal account versus the business bank account, a plaintiff in a lawsuit could make the case that the investment was never truly separate.
It is key that landlords using an LLC keep finances completely separate between the LLC and anything from your personal life. This means no trips to the mall for new shoes with the LLC debit card — no matter what.
Are There Tax Benefits To Having An LLC?
LLCs do not help landlords save on taxes. LLCs are strictly used for limiting liability; there are no tax advantages. You have the same tax savings regardless if you have an LLC or not.
That being said, the way you prepare for your taxes could be affected depending on the type of LLC you have set up. Keep this in mind if you decide to move forward with forming an LLC.
Tax Liability Considerations
If you’re a single-owner LLC, chances are the way you file taxes won’t change much from life before the LLC. Your property is likely reporting income and losses as a Schedule E on your personal tax returns and will continue to do so under the new LLC.
If the LLC has multiple owners (ex. husband/wife), a separate partnership tax will have to be filed. In other words, the LLC will have its own tax return. If you’re married and don’t want to file this way, the only way around this may be to have one owner and the spouse have right of survivorship, meaning, in the event of your death, your spouse would then become the owner.
Since every landlord’s situation is so different, you’ll want to check with your tax professional before jumping into an LLC if taxes are of any concern. Never try to navigate the tax system on your own. Even if you know a lot about taxes, making a mistake could be financially damaging and should be avoided.
Setting Up An LLC For Rental Property Management
If you are considering setting up an LLC to change the structure of how you manage your rental properties, you’re probably wondering what to do first. You might even be wondering about the merits of setting up an llc vs a trust for rental property management and disbursement.
Here are some important considerations to keep in mind while you are working on setting up your LLC.
Consider How Much A Landlord LLC Costs To Prepare
There are a few different ways that you can set up an LLC. The cost and time required for each of these methods vary, so you’ll want to choose what suits your rental property business best.
If you’re a do-it-yourselfer landlord, you’ll likely be visiting a site like RocketLawyer.com to create your LLC. The base cost is $79, plus any applicable state filing fees. The state filing fees range from less than $100 to over $200. Check your state fees by selecting the state in the drop-down box on their pricing page.
Of course, you’ll get hit with all kinds of upsell opportunities to drive the price higher and higher. Legalzoom LLC costs, for example, can vary widely because there are so many potential things to add to your package.
The estimated cost to DIY your LLC setup is between $300 and $1,000 depending on how much your state fees are and what types of upgrades you decide to use on the third-party websites.
Another option is to use an attorney. If you already have an attorney who assists you in real estate transactions, they can likely also help you set up an LLC. Using a lawyer is likely to be around $2,000, but this cost allows you to do nothing but sign the documents; the lawyer does everything else.
Here’s more information on how to set up an LLC for your rental property:
Set Up An LLC Bank Account
Setting up a bank account for your LLC is fairly easy once you have all the documentation from the state and a Tax ID number.
All that you will need to do is go to the bank to set up a business account. Once you provide your state-provided numbers, the bank will walk you through setting up the account. The exact process will vary by bank, so contact your local financial institution to find out how to do this.
Having a separate bank account is a must to keep the business transactions clearly separated between your LLC and your personal accounts. Additionally, this separate account will make accounting a lot cleaner come tax time.
Can You Transfer A Mortgage To An LLC?
One final thing to remember about LLC banking is to beware of your bank’s (or mortgage holder’s) policy on transferring ownership of the property to an LLC. If you purchased the property personally and then transfer it to an LLC, you may enact the bank’s due on sale clause.
Since most lenders will look at the transfer from personal to LLC as a sale, according to the mortgage terms they can accelerate the loan and cause you to have to pay the balance or refinance to keep the loan open.
This can turn into a mess if you lose a low interest rate on the refinance or, even worse, don’t qualify for a new mortgage at the time. Be sure to get answers from your lender about how this situation would be handled before switching to an LLC.
Comparing: Landlord LLC vs Umbrella Insurance
All landlords should have a separate landlord insurance policy for their rentals. This is important enough to repeat: ALL LANDLORDS SHOULD HAVE A SEPARATE LANDLORD INSURANCE POLICY!
An LLC is used to create a barrier between you and your assets. Its sole purpose is to reduce your liability as a real estate investor.
An umbrella insurance policy (sometimes called “excess liability”) will cover you up to a certain amount for large lawsuits filed against you.
Events such as the following could be covered under this type of policy:
- A guest trips and falls on a bad stair
- A third party sues you (neighborhood kid slips on your sidewalk)
- Landlord negligence that results in theft such as not changing out locks
Hypothetical Scenario
Let’s use a real-life example to break down what would happen to a landlord based on their protections.
A jury in 2017 awarded a construction worker in Arizona $1,600,000 for blindness caused to one eye while on the job. Now let’s say you have an elevated porch on the rental property and it collapses while your tenant was having a BBQ.
The aftermath results in one guest being permanently blinded by the accident. The tenant’s guest successfully sues for medical bills along with pain and suffering. The courts award them $1,600,000 in the verdict.
If the landlord has no insurance and does not have an LLC, they will pay this out of pocket.
If the landlord has an umbrella policy but no LLC, they will be on the hook for whatever the policy does not cover. A common umbrella policy is for $1 million in protection. In this case, the landlord is still responsible for $600,000.
Without an LLC, the injured person will go after the landlord’s personal home, rental properties, autos, and savings to recoup the additional $600,000. They can even garnish future wages up to 25%.
Now, let’s say the landlord had the insurance policy AND an LLC.
The LLC acts as a liability barrier between the landlord and the rental property. The injured party could go after the rental property, but the landlord’s personal assets will be safeguarded from the lawsuit. This will keep the landlord from being responsible for a large amount of money in this situation.
Another way to add even more protection to your property is to require your tenants to have renter’s insurance if that is allowed in your state. Renter’s insurance may also kick in to cover some situations covered under an LLC and umbrella policy so there is even more protection at work.
Should I Create A Landlord Management LLC?
Here at RentPrep, we were happy to welcome Mark J. Kohler on our podcast to discuss this topic at length. He’s an attorney and CPA who sets up LLCs for small business owners all over the U.S.
In the video above, he lays out these tips for creating an LLC:
- Set up the LLC in the correct state (4:15)
- You have to register where the property is located (6:00)
- Find the right balance for setting up your LLCs (7:45) – “It’s not the quantity of properties but the quality of properties”
- Find a law firm you can trust to get set up correctly (9:15)
- Maintain the entity (11:20)
- Use your LCC (13:45)
- Deed the property to the LLC (16:00)
- Have a checkbook and tax ID number (17:00)
- Rent is paid to the LLC account (17:00)
- The lease agreement is reflective of the LLC (17:00)
- Do the annual maintenance (17:00)
Pros And Cons Of LLC For Rental Property Management
Do you feel like you have a better understanding of LLCs and how they can benefit rental property management? Check out this quick recap of the pros and cons of having an LLC for your rental property.
Pros Of An LLC
- Limits your liability by creating a barrier between your rental properties and personal assets
- Organizes your business in a more professional way
- Reduces personal liability substantially
- Taxes remain similar to sole proprietorship; does not require C corporation filing
Cons Of An LLC
- Costs money to set up
- Must maintain the LLC and keep yearly meeting notes
- Ongoing maintenance costs
- Must follow legal framework rules of an LLC to be valid
As you can see, there are a lot of factors in play when considering whether or not to set up an LLC for your rental property management. In fact, there is a lot to consider across the board when working as a landlord.
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Top Landlord LLC FAQs
How does an LLC work for rental property?
Despite now knowing more about LLCs, you might still be wondering exactly how an LLC would work for you. As a landlord, it’s important to consider the entire process before deciding whether to go forward.
First, let’s walk through an overview of the path you would be taking to set up an LLC:
- Research any loans or mortgages you have on your rental properties. Find out from the lender whether not those financial obligations can be transferred to an LLC and what the associated fees would be for doing so.
- Choose a name for your LLC and make sure it is available.
- Write up an LLC Articles of Organization, LLC Operating Agreement, and LLC Notice of Intent. Alternatively, use a professional service to do the paperwork for your LLC so that you can invest your time in other tasks.
- Get any required licenses and permits that you need in your state, and then register your LLC with your state. This may require you to pay any associated fees. If using a website, this may be included in the process.
- Once you receive documentation from the state, this can be used to set up a bank account for each LLC; do this as soon as possible.
- Before using an LLC to operate business at an owned property, make sure you transfer ownership of the property to the LLC.
- Finally, update all future leases so that the property owner is correctly listed as the LLC.
Should I create an LLC for my rental property?
Only you can make the final decision about whether or not to make an LLC for managing rental properties. Still, most experienced landlords find that an LLC creates peace of mind and a more professional organization.
Creating an LLC protects your personal liability, and setting up multiple LLCs can help protect each property from one another. Additionally, there is some level of ease added to the tax process when you have an LLC, particularly when compared to a corporation. Still, there aren’t any major tax cuts given to LLC operators.
If you feel that setting up an LLC might make sense for managing rental properties, talk to a qualified attorney or visit an LLC-creating website for more info today.
Should landlords have a separate LLC for each rental property?
This really depends on the quality of the properties and not the quantity. Having one rental with $500,000 of equity is the same as having 10 rental properties that total $500,000 in equity. It could make sense to have one LLC for a premium rental property, and it can make sense to cluster five lower-equity properties into one LLC. This is where consulting with a real estate attorney can be helpful to decide what suits your needs.
Can an LLC rent out a house?
As long as the property owner and local rules allow it, an LLC can rent out a property just as it can purchase a property. In some cases, the landlord may request that the individual members also sign the agreement for an added level of protection.
How to report rental income for LLC?
Rental income made through an LLC is reported differently depending on whether the LLC is operated by a single individual or a group of individuals.
If running an LLC as a single individual, the profits and losses will be reported through a Schedule C document on your taxes. You will need to pay self-employment taxes on this, but the LLC itself does not need to file taxes.
If running an LLC as a group or partnership, the LLC will need to file its own tax documentation, and there are a few options for how to file these. Filing with either an S-corp or C-corp structure could help you to save money. Regardless, each member will also need to file for the amount they personally made from the business.
Talk to your accountant for more information to ensure you file taxes most effectively.
Is a landlord a sole proprietor?
Unless you form an LLC or another type of corporation to manage your rental properties, you operate as a sole proprietor when you work as a landlord. This means there is no clear delineation between your personal and business finances, and there are also limited protections for your assets.
For this reason, many landlords decide to try out an LLC structure. Some even incorporate with other members and file with the LLC as a corporation to get the biggest benefits. Depending on the size and structure of your organization, there are several different incorporation paths to choose from.
Moving Forward With Landlord Property Management
For many landlords, setting up an LLC makes sense. Not only is it a relatively straightforward process, but it also helps to protect you from potential liability incidents that could come up and affect your personal belongings.
Most landlords will find that an LLC situation has major benefits. The only time when using an LLC doesn’t make sense is if you have enough insurance coverage and a better tax situation if you remain without one.
The best way to compare options and to work that out is to consult professionals who understand your unique situation and who you trust to advise you.