Should Landlords Set Up an LLC for a Rental Property?

Written on August 10, 2015 by , updated on September 6, 2017

create an LLCIf you own rental property, you’ve probably wondered about forming an LLC, a limited liability company.

Although there isn’t one answer that applies to all landlords, there are some compelling reasons to form an LLC and some reasons not to. Once you understand the basics, it’s still a tough decision to make. But you’ll at least be more knowledgeable when consulting with your financial advisor.

LLCs Protect Your Assets

The main reason people set up LLCs is to protect their personal assets. An LLC shields you personally from being sued, though your company could still face litigation.

For example, your tenant’s drunken friend falls down the stairs and got hurt. You’re the big pocket in this scenario. When the friend sobers up, he figures he can sue you on some trumped-up reason. If that happens, you’d be named in the lawsuit and would have to defend your own personal assets.

If your property were under an LLC, however, only the LLC’s assets would be under attack.

Lots of Tax Stuff to Know

LLCs have “pass-through taxation,” which means that the LLC itself doesn’t pay any taxes. Any income made passes to the LLC’s owner or owners.

If you are the only owner of the LLC, you would report your taxes the same way you probably do now, assuming you’re a sole proprietor. That simply means you own rental property but are not a legal entity.

If your LLC has more than one owner, such as you and your spouse, the LLC files a separate tax return. And that could cost you extra money if you use a professional to do your taxes.

You can set up an LLC as an S corporation or as a C corporation, perhaps to reduce taxes if you pay self-employment taxes.

How you’d set up your LLC and whether you should set one up at all for tax purposes are matters to discuss with your tax advisor who can help you determine which setup, if any, would benefit you most.

LLCs Aren’t Free

A good reason to not set up an LLC is that is costs money to do so. You can set up an LLC with your local State Corporation Commission, and pay a small registration fee (usually $50-$150).

Or, you can hire a services company such as LegalZoom, which should cost you several hundred dollars when all’s said and done.

If you have an attorney set one up for you, you’ll probably pay between $1,000 and $2,000.

Also, some states charge either annual fees or taxes in addition to the setup costs, and that could be a deal breaker for you. For example, California has a relatively inexpensive filing fee, but then it charges some hefty taxes each year. You would need to check what the fees and taxes for your state are.

Insurance Also Protects Your Assets

If you have rental property, you should have landlord insurance, called a dwelling policy. This protects your rental property, and depending on your policy, it pays either cash value or replacement cost if catastrophe strikes.

You can also add loss of rental income to the policy. And you can get umbrella insurance on your dwelling policy to protect you from being sued.

The catch is that your insurance might not cover the total costs you incur. If that happens, your personal assets are at risk. Not so if your rental properties are protected under an LLC.

Moving an Existing Property with a Mortgage

If you already have a house you rent out, and you carry a mortgage on it, you might not be able to move that house to an LLC easily. This looks like a sale to the lender who might call in your mortgage, called a due-on-sale clause. You might lose out on your low-interest rate when you refinance, or you might not qualify for a mortgage anymore, depending on your circumstances, if that happens.

Keep Your Money Separate

If you do set up an LLC, be sure never to mingle your LLC money with your personal money.

If you head to the mall and use money from your LLC to buy a new outfit, or if you use your personal money to pay for a new garbage disposal for your rental property, a person suing you could claim that your LLC is not a separate entity. That could mean you lose your protection!

Related: 6 Ways to Avoid the Hidden Dangers of Co-Owning Property

Consult, Consult, Consult

As you can see, the issue of whether to form an LLC is complicated, and each landlord’s situation differs. Now that you know the basics, consult with your financial advisor, your CPA or your attorney to find out whether an LLC will benefit you.

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153 CommentsLeave a Comment

  • Phillip

    Not mentioned is the fact that in civil proceedings (such as unlawful detainer), technically only a lawyer can represent a corporate entity (such as an LLC). Since I do my own evictions and other legal work, this is the main reason I don’t hold my properties in a corporate structure, choosing to carry heavy-duty insurance instead. In reality, I’ve seen plenty of property managers who aren’t attorneys representing companies in eviction proceedings in my local general district courtroom, but the law about this is crystal clear, and I’m not willing to risk it.

  • Nick

    Do you have to put your properties in the LLC at cost or appraisal.? The second choice can be a problem when you have held the properties for 25 years.

    • Lucas Hall

      Hi Nick,

      Why would you need to assign a value to it if you are simply transferring the title to the LLC?

      Last time I checked, the appraisal is only used for tax and insurance purposes (and financing).

  • Al Williamson

    Registration fees are $850 here in CA! Ouch!!

    The reason I formed was for
    1) significant tax benefits
    2) a more professional brand

    So far, the Pros far out weigh the Cons for me.

  • Munro Merrick (SBN 73811)

    LLCs Protect your Assets, as do corporations, either C or S. An LLC is not a corporation. It is a separate legal entity. It may be taxed as a corporation, a partnership, or not at all — profits are allocated to the owners.
    LLCs are taxed on income over $250,000, corporations on profit. LLCs taxed as corporations and C corporations pay minimum tax of $800 every fiscal or calendar year, except that Corporations get a free ride the first calendar year. To decide which entity to choose, you need your best forecast of income and profit for at least (in my opinion) 5 years. Then sit down with a good business accountant, make an informed decision. Then hire an experienced business attorney, prepare corporate/LLC documents that fit your needs.

  • Sonja

    Thank you! What about a Trust? I know they protect your assets from probate but do they insulate you from any personal liability? Do they have any legal life benefit?:-)

    • Lucas Hall

      Hi Sonja,

      Though I’m not a lawyer like Munro, it’s my understanding that a living trust is a entity too, and any assets in such trust are not assets of a particular person, but rather the trust. It seems to me that they could be protected that way too – but please talk to a lawyer to be sure.

  • Sonja

    Thank you! I really like your site!

  • Denise Flynn

    My property landlord recently changed his rental property where I live to LLC. What does this mean for the renter?

    • Laura Agadoni

      Hi Denise,
      I have a really short answer for you: nothing. :)

      Setting up an LLC affects only the landlord and does not change a lease you might have.

    • Veronica

      Denise It would not change the terms of the lease in any way. However, if there were lets say a problem with the landlord not returning your deposit, and the bldg. owner was listed as an LLC you would not sue the landlord but rather the LLC and serve the agent representing the LLC.

  • George Lambert

    With an LLC a mortgage company will make you personally guarantee the note. Yes, it might protect you from liability in case of a law suit. But a good umbrella liability insurance policy can protect you even better and can cover several properties.

    George Lambert
    Author, What You Must Know BEFORE Becoming a Greedy Landlord. How to build a portfolio of investment properties for an income that lasts a lifetime.

  • Kendra

    I am a new Landlord preparing to rent my property which is under an LLC. Should I set up the name of the Landlord in the Lease Agreement to be the name of my LLC or in my personal name? Thank you, I appreciate your site!

  • Sid

    Could you keep the rental properties in your name, form an LLC, lease them to your LLC and protect your assets that way?

    • Laura Agadoni

      Hi Sid,
      I’m not an expert, so please check with a lawyer or a tax expert. If the property is still in your name, however, I’m not sure how that would protect your assets.

  • LAWRENCE

    If I own a three family home and I live in one of the units does think count as my primary residence in which it would hold some disadvantages to move my asset under it’s own LLC? Also would I have to personally pay rent to the LLC or is my tenant paying rent to the LLC adequate enough to avoid tax trouble?

  • Laura Agadoni

    Hi Lawrence,
    It would be best for you to speak with a tax expert about this. Good luck.

  • Antonio Hopkins

    I am looking at buying an investment property. I have talked to a couple of different lenders, and they quoted me 25% down and a fixed interest rate for 15 years at 3.75%, but here’s the catch, this is only if I put the property under my name. If I don’t and put it into an LLC or S-Corp, I am looking at 25% down and then a variable interest rate starting at 3.75%-7% with a 3-year balloon that is re-assessed and is changed depending on the market. My question is should I put it in an S-Corp or LLC or just put it under my name? I am not worried about the liability implications because I have landlord insurance along with an umbrella policy. My worry is the tax implications. Can someone provide some advice?

    • Laura Agadoni

      Hi Anthony,
      I can’t provide that sort of individualized tax advice. Your best bet would be to speak with a tax expert. Good luck!

      • Antonio Hopkins

        Okay. The reason I ask is because if the interest rate stays at 3.75%, I can make a pretty good return on my investment, but if the interest rate goes up to 7%, there is not much left for profit, especially if the three-year assessment rises more than 7%. The only issue I am wondering about is how much will I be taxed if I left it under my name, rather than an S-Corp/ LLC? I am sure someone has faced a similar dilemma before.

  • Jeff

    Hello, I have recently inherited a single family residence property in California. I am co-beneficiary with a long distance sibling. We are exploring renting the property as the advantages are very favorable.

    I would like to create an IRrevocable trust with my sibling and I as co-trustees and create an LLC without my sibling (knowingly) to rent/lease the property to a third party. The trust would lease the property to the LLC that would pay yearly. The purpose is to separate ownership from management, negotiate a stable income stream for the trust, and generally avoid managing a business with family members. Comments?

  • Ingrid

    I own a property in FL. that my son’s business is renting from me. The mortgage is in my name. Is it possible to either transfer the title to his business, in which case the business will own the property and pay the mortgage and be in the business S corp, or can I form a LLC to protect me personally? Thank you for your advice.

  • Vanzila

    I keep hearing about how if your property is in an LLC then a tenet who, for example, is paralyzed on your propety would only sue your LLC. There is nothing stopping his attorney from naming you personally in a lawsuit, especially if negligence on your part is evident. A good attorney would do that! Especially if there is more to gain by doing so.

    I own properties and also have multimillion dollar personal stock portfolios and cash accounts. My belief is I should put my large personal assets in an LLC! No lawyer has ever mentioned this idea. I keep my properties under my name with an umbrella policy of 4 mil. coverage. I have yet to put my stock holdings in an LLC, but that seems like the most sound idea for shielding personal loss.

  • Benjamin

    Hi Laura,

    I bet you’re just about tapped out on this Q&A. Got time for one more?

    I am in the process of starting a PLLC for my real estate business. I’ve been selling for over 7 years, and just it seems to make sense at this point to be taxed as an S Corporation. I also recently rented out my personal condo. The property is in my name, as is the lease. If I were to quit claim this condo to my new PLLC, should I have the tenant sign an addendum acknowledging that the lease is now between him and the PLLC? Or can I just leave the lease alone and start running rents through the PLLC account? Also, having received first month’s rent already in my personal name, prior to forming the PLLC, has that already pierced the vial?

    Thanks!

    Benjamin

    • Lucas Hall

      Hi Benjamin

      It’s probably too late to hide from your current tenant, as you’ve already done business with them and they know what’s going on. It’s probably irrelevant where you send the rent money at this point (through you or the LLC), and I would do whatever is more convenient for this lease. But going forward, you could have things lined up to work out of the LLC, and your involvement would simply be a manager for the “owner” (the LLC).

      Other common issues to consider: if you quit claim it to the PLLC, will that mess up your insurance, or cause a due on sale with your mortgage company?

      I hope that helps. Please know that I’m not a lawyer nor is this legal advice.

  • MatthewJ

    Hello, I’m doing research on the pros/cons of an LLC for Rental Property+. I have existing properties in states where I don’t currently live. Can I set-up an LLC and own properties in other states (under one LLC)? Example: I live in Colorado but have rental properties in Florida and Indiana. I would also like to have the LLC cover future IT consulting services in Colorado (so multiple purpose LLC)?

    • Lucas Hall

      Hi Matthew

      LLCs are generally regulated and issued by the State Corporation Commission. Because of that, you might to need register a new LLC in each state that you do business since you have an income-generating asset. Since you have a complex situation, I suggest you seek legal advice from a lawyer. Cheers!

  • George

    Thank you for all the valuable information in this thread. Here is my scenario: my 3 family rental property is owned by myself and another 50% partner in an LLC. Refinancing has been a nightmare and has been very limited. We have discussed moving the deed out of the LLC into my personal name to obtain better financing options and allow the LLC to continue to manage the property and pay the debt. Does this keep my partners interest the same since the operating agreement names this property already, regardless of how it is deeded? Also, if anyone has referrals for community banks or portfolio lenders that don’t beat you up with heavy fees and prepayment penalties over the LLC structure please send them my way asap!

    Thank you in advance.

    • Lucas Hall

      Hi George,

      Because the consequences of your upcoming decision can affect your finances for years to come, I want to strongly encourage you to talk to an attorney who handles business entities and real estate. If I were in your shoes, I might even get opinions from two attorney’s – that’s how important it is for you to get this right.

      Taking a property out of an LLC would have ownership and tax consequences. I’m not an attorney, but I don’t see how your partner would keep any interest, because the asset would no longer belong to the LLC.

      Have you tried a lender who specializes in rentals and multifamily. I’ve not used this company, but I’ve heard good things about them: http://www.lendingone.com/. It might be worth a phone call with them – or other lenders like them.

      I hope that helps.

  • Rachel

    Hi there,
    I recently purchased a property solely as a rental and my tax guy said that LLC doesn’t affect taxes. Does that sound right in Utah? I see lots of items here talking about tax ramifications.

    Thanks

  • Michele Ural

    If you have a property in an llc, a plaintiff is awarded an amount greater than the liability limits, and you have 20% equity in the property, what happens from there typically?

  • bill

    i own property in a smllc. i plan to hire a management company. can that management company be my own company?

  • Daniel

    Hi Laura,

    I recently transferred my rental property in Florida to my LLC. As a result, my current insurance carrier doesn’t offer liability or hospital payment insurance since it’s insuring a person. Is this normal?

    To top it off, I purchased the house with the help of a lender. I am aware that they could call the loan due, but I always pay my mortgage on time and after extensive research, I’ve never heard of that happening to anyone. When they get the change of insurance, they’ll see I’ve moved the house to my LLC (which I assume they see all the time) but I’m afraid that changing insurance carriers as well so I can continue to have liability insurance would cause one too many red flags.

    Any thoughts?

    Thank you!

  • Lupe

    Have a rent property and my home that are both paid for and a 401k and pension and a new business venture and retiring in 2 years how to protect all my assets in case of a severe illiness.
    Can I just transfer all property to my kid or grand kids ?

  • Rochelle - California

    What is the difference between and S-Corporation and a C-Corporation?

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