While there are benefits and downsides, forming an LLC for your rental properties can be a powerful way to protect your personal assets.
As a landlord, you may be wondering: Do I need an LLC for my rental properties?
Of course, the answer will depend on your specific scenario — but on a whole, having a landlord LLC can be a powerful form of legal and financial protection.
Whether you own one rental property or many, forming an LLC can be one of the best decisions you make as a landlord. Ready to learn the ins and outs of landlord LLCs? Let’s take a look.
What is an LLC?
By definition, a limited liability corporation (LLC) is a separate and distinct legal entity — meaning your personal assets are separated and protected from potential lawsuits. LLCs were first introduced in 1977, and have become increasingly popular since then.
Since LLCs are regulated at the state level, the process of creating an LLC will differ depending on your specific location. However, there are a few considerations that apply to every landlord, regardless of geography. Read on to learn some of the biggest benefits of creating an LLC — as well as potential considerations to keep in mind.
Benefits of an LLC
By forming a landlord LLC, real estate investors can reap significant rewards — including personal asset protection and built-in tax benefits.
1. Personal asset protection
Operating a rental property business as a sole proprietor comes with inherent risk. If you don’t have an LLC, there’s no separation between your rental income and personal income. That means if the property is in your name and a tenant, vendor, or other entity decides to sue you, they can go after your personal assets.
An LLC mitigates this risk by making your real estate business a separate and distinct entity. If you run into a legal issue and your property is owned by an LLC, your personal assets are protected.
2. Built-in tax benefits
Legal provider Nolo notes that an LLC is not a separate tax entity like a corporation; instead, it is what the IRS calls a “pass-through entity.” Your rental income and losses “pass through” the business to the LLC owners, who report that information on their personal tax returns. In many cases, according to FortuneBuilders, this structure results in lower tax rates for the rental property owner. But while LLCs are not taxed directly at a federal level, some states do require annual LLC taxes.
3. Establish a business profile
By creating an LLC for their rental property business, you can build a business profile and credit history that’s separate from your personal profile. As your business grows, this will help you qualify for non-recourse lending (i.e., a loan that’s secured by collateral but you’re not personally liable) which allows you to minimize risk to your personal assets and finances.
Potential downsides of forming an LLC
Now that you know the benefits, here are a couple of important factors to keep in mind when evaluating whether to form a landlord LLC for your rental properties.
1. It can be costly depending on your location
On average, the average annual LLC tax is $91. But that amount, as well as the filing fees, vary vastly depending on where you operate your business. For example, forming an LLC in California costs $70, but California LLCs that make $250,000 or less must pay an annual tax of $800 — and California LLCs that make more than $250,000 must pay additional fees ranging from $900 to $11,790 per year (depending on the LLC’s annual income).
On the other end of the spectrum, Arizona LLCs have no annual tax and only a $50 filing fee. When considering LLC formation, research your state’s tax policies to see which rules will apply to your business.
2. Commingling has serious consequences
As a real estate investor, it’s essential to keep your personal income and expenses completely separate from your LLC income and expenses — otherwise, you could risk losing the liability protection entirely.
Each LLC requires a separate bank account to avoid commingling, so you’ll need to make sure you’re not depositing rental income into your personal account or using business assets to pay for personal expenses — and vice versa. To that end, Zibo offers a bank designed for landlords with a 1% cash back debit card to allow you to easily manage your real estate finances and avoid commingling.
3. LLCs require ongoing maintenance
Once you form your LLC, your work is not done. Most states require period renewals, fees, and maintenance to keep your business entity in good standing and continue your personal liability protection. These tasks are not usually complicated — for example, California LLC owners must file a statement of information form every other year and pay a franchise tax annually. LLC owners also need to keep up-to-date records of key documents required by your state, which could include your Articles of Organization, Statement of Information, or Operating Agreement.
While these tasks are not usually complicated, forgetting to stay on top of them has serious consequences — from late fees and penalties to suspension of your LLC, which eliminates your protection.
Do I need a separate LLC for each rental property?
One common question is whether landlords need to set up a separate LLC for each of their properties, versus one for their entire portfolio.
There’s no wrong answer here — but your decision will depend on your risk tolerance. Setting up one entity per property offers the highest level of protection, because when you bundle properties together into one LLC, you’re exposing the profits of one property to the potential liabilities of another.
That said, each LLC comes with costs, so work with your CPA and potentially a real estate lawyer to figure out what’s right for you.
How to set up a landlord LLC
If you’re interested in forming a landlord LLC, there are a few different ways to get started.
On one hand, you can take a DIY approach and form an LLC yourself through Rocket Lawyer or LawDepot — a relatively affordable option for landlords who have simple real estate portfolios and don’t mind doing some of the work themselves.
Alternatively, you could choose to hire a lawyer to handle the LLC formation from beginning to end. Of course, this option will be a bit more costly — while LLC setup software may cost a couple hundred dollars, business lawyers are estimated to charge between $1,000 and $1,500 for LLC formation services.
Alternative options to protect yourself and limit liability
Outside of LLC formation, there are other ways to help limit your personal liability as a rental property owner.
A big one is landlord insurance, which is required by mortgage lenders and specifically designed to protect your rental property owners — this way, you won’t have to pay out of pocket if something bad happens such as property damage or injury. Umbrella insurance policies add an extra layer of protection as well, covering a range of liabilities including fire damage, flooding, and vandalism. Not sure which insurance carrier to contact? Get a free quote from top carriers through Zibo Insurance Services.
It’s important to note that landlord insurance and umbrella policies may not always be enough to protect your assets. Insurers can lower coverage, deny claims, or cancel policies — so forming an LLC in addition to taking out a landlord insurance policy is still a good idea.
Grow your rental property business with Zibo
Whether you’re already operating as an LLC or exploring the steps for incorporation, Zibo is here to help you manage your rental property finances and grow your portfolio. Sign up for our free, all-in-one financial platform for landlords today to get access to banking, payments, and expense management as well as competitive loans and insurance policies.
You can choose to sign up for Zibo as a sole proprietorship, single-owner LLC and or single-member corporation. Landlords operating under an LLC can select whether to invite tenants using their legal name or LLC name, and soon will be able to use Zibo’s other features to pay bills and vendors under their LLC name.
Looking for more ways to improve your landlord operations? Check out the “Protecting Your Real Estate Assets” chapter in our free Real Estate Investor's Guide for actionable tips from industry and legal experts.
