LLCs are all the rage and, if you've been in the property rental business for a while, you are likely familiar with the term "LLC". For newbies, Limited Liability Companies (LLCs) are the least complicated way to structure a business so as to protect personal assets in the event of a lawsuit. LLCs can be owned by multiple members or they can exist in a single member format, a.k.a. just you!
As previously stated, LLCs act as protection against lawsuits and are great for reducing paperwork in contrast with other legal entities. LLCs do not suffer twice the tax consequences that other business do (corporations, for example) and make for a more credible business presentation.
The are several opinions regarding the benefits of LLCs. Innovative Property Solutions invites you to consider three of them:
Liability claims, unfortunately, can and WILL happen at some point in your life as a rental property owner. Claimants can only go after an LLC and not you in the event that you are sued; your LLC becomes a protective wall between you and the claimant. Of course, there is the aspect of liability insurance: it does not replace the LLC status and cannot protect you to the extent that an LLC can.
LLCs allow for tax write-offs such as business expenses and are a more "legit" form of filing rather than personal tax write-offs. While personal write-offs are not illegal when filed according to state and federal law, the IRS pays a little more attention to such a filing format then they would to an LLC structured business format.
LLcs which are properly registered with the Security and Exchange Commision can legally sell shares or offer interests to fellow investors and can be sold as an asset-owning business.
LLCs are not always the solution for rental property owners wishing to establish a proper business format. In fact, there are two arguments which can be made against them:
House hacking is becoming popular with millennial investors, however LLC status can obstruct the prospect of obtaining appropriate financing for future investment properties. For example, low down payments, Fannie Mae and FHA mortgages are not compatible with LLCs. In such instances, it is best to obtain an insurance policy as lenders will only back you under your personal name.
LLCs are not an option for low cash flow. In the event that rental property owners are purchasing homes upwards of $100K and supplying a down payment of $20K+ with closing costs, LLC is the way to go. However, if such funds are unavailable, an LLC would not be beneficial. Commercial financing for properties from various lenders are an option and, in some cases, smaller financial institutions such as your local bank might be the way to go.
In any event, consider establishing your LLC online with the assistance of your attorney and the understanding that you are building your property rental business as a business and it is to be operated as such.
IPS suggests that you consult your attorney and accountant to verify all information as this content is not intended as legal or financial advice.