Landlord LLC Benefits: Everything You Need to Know
Landlord's LLC benefits are crucial when running a business. This article will cover some of the important ones so owners of LLCs can better understand them.3 min read
Landlord's LLC benefits are crucial when running a business. This article will cover some of the important ones so owners of LLCs can better understand them.
Overview of LLCs
Landlords often wonder if they should create a limited liability company, or LLC, for the rental properties they have. This normally comes up due to tax liability and legal liability. When figuring out if an LLC structure is right for the business, look at each part first. Every landlord has a different tax situation, so it's helpful to talk to a tax preparer or accountant before making a decision.
LLCs did not exist until 1977 when Wyoming accommodated an oil company's needs. The LLC structure is preferable for someone who has invested in real estate property. Before LLCs existed, investors of real estate who wanted limited liability protection were limited had to structure their business as a corporation.
Florida followed a few years later and enacted their LLC statute, and now every state in the United States has laws about LLC business structures. Owning investment property through a limited liability company is advantageous as it protects the owners from personal liability. This type of business is easy to set up and has several tax advantages.
Typically, a landlord acts as a sole proprietor, so there isn't a divide between the personal income and rental income. If the owner doesn't plan to expand their real estate investment portfolio, this might be fine. However, if they ever face a lawsuit, their personal assets are suddenly at risk.
LLCs and Incorporation
The definition of incorporation is when a business is formed as a corporation, and the personal income and rental income are separated. Operating a business as a corporation reduces the owner's liability when it's a separate entity. This means the owner won't be held liable if the business has legal problems or debt.
To create a corporation for any income properties, incorporating documents will need to be filed with the government. The title of the properties will also need to be transferred from the landlord to the company with a Quitclaim Deed or Warranty Deed. The act of transferring the title of properties to the company means that the landlord is no longer personally liable. Instead, the business is the owner and absorbs the risk.
An LLC can be created by one person, two partners, or a group. Anyone who owns the LLC is called a member. These companies are controlled by the state, so the procedure to create an LLC will vary with each state. LLCs have pass-through taxation, meaning no taxes will be paid by the company. Income is instead given to members to report on their own taxes, similar to a sole proprietorship.
Members also need to pay for self-employment tax, which does not happen with corporations. LLCs have the flexibility to file a form and submit it to the IRS to be taxed as a C corporation or an S corporation instead. This is a good idea if the company earns a high amount of money and wants to have corporate tax savings. Talk to an accountant or financial advisor first to make sure this is the right decision for the company.
Benefits of Creating an LLC: Limit Your Personal Liability
Forming or incorporating an LLC for properties can provide liability protection and have tax advantages. These advantages include:
- Being put in a higher tax bracket based on your rental income.
- Lowering the individual tax bracket when separating personal income and rental income.
- Becoming eligible to get business tax deductions such as medical insurance and business expenses.
As a sole proprietor, the landlord is responsible for any problems or debt associated with the properties. However, if the landlord forms an LLC, the business is responsible for the risk. If someone brings a lawsuit against the property when it's owned by an individual, their personal assets are at risk. Once an LLC is created, only the assets owned by the LLC are at risk.
If someone gets injured at a rental property, they might sue. However, if the property is owned by an LLC, the landlord is personally protected.
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