Residents
Owners
Landlords have to decide on whether or not to create an LLC, or Limited Liability Company, on their rental property. It’s a common discussion among landlords because it covers two main issues that landlords run into; tax liability and legal liability.
All landlords are going to have unique tax situations which will require an accountant or tax preparer before finding the right answer. Here are a few points to keep in mind when determining if you should form an LLC as a landlord this year.
Legal Liability
Landlords always have to worry about potentially being sued by a tenant. The LLC structure isn’t going to completely protect you against personal liability. You’ll probably be personally liable for neglecting a job that affects the safety of a tenant like snow removal or pool maintenance. If you break the law or use shady business practices, you’ll also set yourself up for personal liability.
You’ll want to be sure to keep the finances completely separate between your personal finances and the LLC. You could become legally liable if you mix the financials because a plaintiff in a lawsuit that you never truly separated your personal and business bank accounts.
Expense
You’ll have to pay for the LLC which ranges from $100-$299. You can take advantage of additional costs for things like a Federal Tax ID or a Registered Agent. You can work with an attorney or websites like LegalZoom.com. It’s cheaper doing it yourself.
When it’s time to set up a bank account for the LLC, make sure you have all documentation and your Tax ID number. The lender’s reaction to the LLC may be the biggest factor in deciding whether or not to get one.
They may have a policy on transferring ownership of the property to an LLC, like the bank’s due on sale clause. With a personal account transferring to an LLC account being considered a sale, the bank can accelerated the loan force you to pay the balance.
Finally, you’ll need to get separate landlord insurance policy for your rentals which are different from a homeowner’s insurance policy. Consider the tax liability as well. Single owner LLC’s won’t affect how you file taxes much while LLC with multiple owners will require a separate partnership tax to be filed.
