You might not consider yourself a business owner if you “just” own and manage a rental property or two on the side of your full-time job, but for liability and tax purposes, you are a business owner. If you have not taken any steps to manage your rental property as a business, you could be putting your personal assets at risk. We explain how forming a limited liability company (LLC) could help you separate your rental property business from your personal assets.

What Is an LLC?

Rental Agreement Paperwork and PenA limited liability company is a business entity that protects its members from personal liability if the company is sued but also offers tax advantages over a corporation. An LLC can have a single member, two partners, or a group of members. If you own a house, multiple houses, or an apartment building, you can form an LLC to be the owner of the property, rather than owning them directly in your name.

Advantages of LLCs for the “Average” Landlord

Clearly, large property groups and real estate moguls operate rental properties through business entities, but is it really necessary if your property investments and rental income are modest? It could be. Here are some of the advantages of holding your rental property in an LLC:

  • Protection of your personal assets. Liability is a big issue for property owners. If a tenant or visitor to the property is injured because of a loose step, burned-out lightbulb, or broken deck rail, you can be sued. Even if you have liability insurance, lawyers could come after your personal assets. However, when the property is owned by an LLC, only the company’s assets are at risk—not your own. This is the biggest advantage of forming an LLC and the reason most landlords do it.
  • Protection of each of your rental properties. If you own several properties, you might set up a separate LLC for each so that only the assets associated with one property are available if you are sued. A business advisor can help you decide if this is necessary for your specific situation.
  • Tax advantages. Whereas a corporation is taxed on its profits, and its owners are also taxed on their income, the members of an LLC are only taxed once on their income. Your personal income tax return will include income from the rental property held by the LLC.
  • Succession planning. It is easier to plan for the succession of an LLC than it is for a house or building owned by an individual, so if you know who you would like to inherit the property, you can add them to the LLC. This way, the succession will not be tied up in probate, and the business can continue seamlessly.
  • Growth potential. When you keep track of your rental property’s income and expenses through an LLC, it is much easier to see its profits and losses and make plans for growth. After all, you are now the owner of a company, and this change in perspective could inspire you to increase its value, add properties, and turn it into a more profitable business.

A business planning attorney can help you determine if forming an LLC is the right move for you. There are some downsides to managing rental properties through an LLC, including the cost of setting one up and renewing it each year. It can also be difficult to get a bank to approve a mortgage for an LLC if you are hoping to expand your business. Finally, there are some very limited situations in which an LLC will not protect you from a lawsuit.

Call the Asset Protection Team at Ross & Shoalmire

If you own a rental property in Texas or Arkansas, reach out to us to discuss whether an LLC makes sense for you. We are happy to discuss the pros and cons and help you come to the right decision. If you choose to form an LLC, we can help throughout the entire process.

 

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