If you’re a first-time landlord or even if you already own a few properties, you might be wondering if it’s worth setting up an LLC to manage your rental properties. After all, you've already gone through the process of finalizing a property purchase and finding a tenant—do you really need to file more paperwork just to make your business official?
The short answer is: yes. You should probably set up a Limited Liability Company (LLC) for your rental property. Being in the real estate business always brings complexities and risks—whether you’re a multi-property real estate investor or just getting started renting a single property out of short-term necessity.
Unless your circumstances are unusually low-risk (you’re renting to a trusted family member or only renting for a short time), you may want to seriously consider starting an LLC. Here are a few reasons why utilizing an LLC to manage rental property is almost always a smart move:
Limit Your Risks
The two “Ls” in LLC stand for “Limited Liability,” which means your LLC serves as a separate legal entity that limits your liability as the business owner. Instead of you as the landlord being personally liable in the event of a lawsuit, the LLC helps protect your personal assets.
For example, what if you rent a house to a tenant who gets injured from falling down the stairs? Or what if a tenant at your house has a party, and one of their guests gets injured on your property? In either case, you could be hit with a personal injury lawsuit.
But if your rental property is owned by your LLC, your legal business entity serves as a corporate shield to protect your personal assets from legal judgments. As a landlord, you can and should buy liability insurance to help cover potential costs from a personal injury lawsuit. But having an LLC will also help protect you from the worst-case scenarios of renting property. This is one of the most important reasons how an LLC can help your real estate business.
Whether you’re a full-time real estate investor or just renting houses on the side of your day job, setting up an LLC for rental property can also offer you some significant tax advantages. This is because the tax treatment of the rental income is different from the income you get as an employee.
If you start an LLC and then set up the LLC to file taxes as an S Corporation, you can help minimize your tax liability by saving money on self-employment taxes. Talk to a professional tax advisor to make sure that an LLC filing as S Corporation is the right fit for your overall tax situation.
Doing business with an LLC also gives you the ability to deduct your business operating expenses for tax purposes as part of maintaining and managing your rental property. This is another crucial reason why an LLC is often a good move: it not only helps you avoid losing money to lawsuits, but it helps you keep more of your money at tax time.
Manage Your Money More Efficiently
We've already seen how LLCs help protect you from the worst case scenarios of being in business, while also helping you minimize your financial costs during tax season. The other most beneficial aspect of setting up an LLC is the way it affects your everyday business operations all year long. Simply put, getting an LLC will help you run your business better and manage your money more efficiently.
When you have an LLC for your rental property, you will have to change the way you manage your money by keeping your business and personal finances separate. You can use your LLC to get a business bank account for your rental property, as well as a business credit card if you choose. This can help you build credit in the name of your business, perhaps qualifying you to borrow money to improve your rental properties.
Having a separate business bank account also has a huge tax advantage: it becomes much easier to keep track of your business expenses. Every time you go to a hardware store or home improvement warehouse to buy tools or materials for fixing up a rental house, you can make sure that those purchases get tracked and deducted at tax time.
Starting an LLC doesn’t solve all of your challenges in the real estate business. You still need to make sure you have the right business licenses and permits to operate in your state and local city. But even if you only own one rental property and you don’t consider yourself a serious real estate investor, it’s in your best interest to act like a legitimate business owner and set up an LLC for your rental homes.
Setting up an LLC can help you reduce your risks, protect your personal assets, and minimize your tax bill. By starting an LLC for your rental property, you'll be well on your way to maximizing your tax deductions and improving your financial efficiency throughout the year.
Are you ready to start your real estate business with an LLC or other legal business entity? Incfile can help you learn about which type of corporate structure is right for you, and even help you start your company once you decide!
Ben Gran is a freelance writer from Des Moines, Iowa. Ben has written for Fortune 500 companies, the Governor of Iowa (who now serves as U.S. Secretary of Agriculture), the U.S. Secretary of the Navy, and many corporate clients. He writes about entrepreneurship, technology, food and other areas of great personal interest.