LLC? Why It Makes Sense to Protect Your Rentals: Property Management Weighs In
Protecting your rental properties requires thinking through the business aspects of operating rentals. When buying properties and housing tenants to generating rental income, you’re running a business!
However, without the right business entity to classify your rentals, your properties and income could be at risk—including your personal assets and income that are unrelated to your rentals.
What’s the right entity for your properties? We pulled our property management experience together to weigh in on this critical question!
Why Many Investors Choose the Limited Liability Company (LLC)
One of the simplest and most beneficial business entities for real estate investors is the Limited Liability Company (LLC). It’s one of the best ways to separate rental income and assets from your personal assets in the event of a lawsuit.
Without the protection of a business entity, a lawsuit could lead to significant payouts and losing your properties and ability to operate legally. Depending on the outcome of a lawsuit, your personal income or assets could also be part of a settlement.
With an LLC in place, a lawsuit or legal action that involves a rental property will only affect your rental property business. Your private residence, accounts, and assets remain separate and safe.
Why Should You Choose An LLC?
Compared to a few other types of business entities that we’ll cover today, an individual LLC is simple to set up and affordable for most rental property owners. It’s also simple to operate with fewer legal or IRS requirements than more complex business structures.
With an LLC, property owners must choose a business name and develop articles of organization to get started. You’ll also set up an operating agreement and follow a few simple steps to file your LLC and pay the fee. Every year, you file a few simple documents with the IRS to report on your LLC.
If an LLC is the ideal business entity for your rental properties, work with your lawyer and a property management company to walk you through the process of setting it up and filing paperwork every year. It might seem like a hassle to go through this process. However, the protection of an LLC is a significant benefit when putting tools in place to protect your long-term investments!
Other Entities to Consider
If you’re not sold on an LLC, there are other options to protect your business with a legal entity. Keep in mind that every type of incorporation has different rules and regulations for legal operation. Research each option thoroughly and work with your legal counsel to set up the solution that makes the most sense for your real estate rentals and portfolio.
Using an S Corp offers excellent tax benefits, but it also comes with stricter IRS requirements than incorporating as an LLC. To qualify as an S Corp, your rental property business must:
- Be based in the U.S.
- Have no more than 100 shareholders
- Use only one type of stock
In addition, some shareholders must meet certain eligibility requirements, including being an individual, a specific trust or estate, or a certain tax-exempt organization.
When it’s time to file taxes, S Corps are an excellent benefit. Your business may pass business losses, income, deductions, and credits directly to shareholders—without paying federal corporate taxes. You might have heard of this type of structure as a “pass-through” entity.
Work closely with your accountant and legal consultant when choosing an S Corp. It’s an excellent way to maximize tax benefits and protect your properties. However, it also involves a significant amount of rules and paperwork to maintain it legally.
Do you have an investment partner? If you operate your rental properties with two or more people, partnership incorporation could be an excellent structure for your investments.
As a partnership, you and your co-investor or investors split the income from rental properties. Each of you also pays taxes individually—not as a business entity.
There are different types of partnerships, so be sure to do plenty of research before deciding on a general partnership, limited partnership, or limited liability partnership. As with an LLC, you’ll need to settle on a name for the business and register with the state using your Employer Identification Number (EIN).
Use Property Management to Protect Rental Properties
No matter which entity is the best solution for your rental properties, make sure you choose something! You’ll enjoy the protection and tax benefits of any of these legal structures—and you still have the flexibility to operate your properties with a property management company!
While we also recommend consulting your lawyer and an accountant, the right property manager can help you determine the right business entity for your rentals. In addition, Reeder Asset Management also delivers expert property management services to protect your rentals and boost your bottom line!
Get more expert tips to protect your rentals! Download our free resource, “Protecting Your Investment Properties: A Guide.”