Should You Form An LLC For A Rental Property? (2024)

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An LLC is a business structure that protects its owners from the business’s liability and offers pass-through taxation and flexible management. LLCs are relatively easy to set up and are formed within a specific state. Each state has its formation requirements, but you’ll typically file articles of organization with your state, choose a registered agent and get any required business licenses.

Here are the specific properties of an LLC:

• Limited liability: An LLC shields its owners’ personal assets from the business’s debts and obligations. This is different from a sole proprietorship, where an owner’s personal assets are commingled with the business assets.
• Pass-through taxation: LLCs do not pay taxes at the corporate level. Instead, business profits pass through proportionally to each owner’s personal tax return and are reported as personal income. This differs from a corporation that is subject to double taxation.
• Flexible management: LLCs can be managed by one or more owners or appointed employees of the business. An LLC operating agreement typically outlines each LLC’s management structure.

Make sure you check your specific state requirements for LLC filings and fees. Next, let’s see if you should set up an LLC for a rental property.

Anyone who owns a rental property should consider creating an LLC to limit their personal liability and protect their personal assets from the debts and obligations of their rental. For example, let’s say a tenant or visitor gets injured on the premises of a rental property you own. If you operate as a sole proprietorship without the protection of an LLC, your personal assets, such as your home, savings and investments, could be at risk in a lawsuit. However, if you have the rental property under an LLC, your personal assets are typically shielded from such liabilities. The liability protection of an LLC helps safeguard your personal finances in case of legal claims related to the rental property.

Creating an LLC will also help you separate your personal and business expenses for better recordkeeping, which can be helpful at tax time.

Specifically, this is when you should create an LLC for your rental:

• Before your first purchase: It’s easier to form an LLC for your rental property before you purchase it; otherwise, you’ll have to transfer your property to your LLC after the fact.
• If you own multiple rentals: Overseeing a portfolio of rentals can be tough and managing them under a single LLC makes it easier for recordkeeping.
• With co-owners or co-investors: If you are co-owning or investing, make sure that you have a clear business framework for ownership, operations management and profit distribution.
• Properties with increased liability risk: While you should always consider limiting your liability with an LLC, if you have a property with a pool or similar amenities, consider protecting yourself with an LLC.

The cost of forming an LLC for a rental property is generally the same process and price as forming an LLC for another business function. The overall cost will largely depend on the filing fees charged by the state and the cost of any business licenses.

Based on our analysis, filing costs range from $150 to $4,000-plus. This range includes all potential fee types, such as the cost of a registered agent, doing-business-as (DBA) fees, reporting fees and more. For a detailed breakdown of the costs of forming an LLC, check out our article on LLC costs.

There are many benefits that make an LLC structure well suited for a rental property. These benefits include:

• Limited liability: Protect your personal assets from the debts and obligations of your rental.
• Pass-through taxation: Unlike C corporations, LLCs are not taxed at the corporate level and avoid double taxation.
• Taxation flexibility: You can also choose to have your LLC taxed as an S corporation. Under this structure, the business still enjoys the liability protection of an LLC, but the owners can potentially save on self-employment taxes.
• Management flexibility: Choose to manage the LLC yourself, together with multiple owners or hire an employee to manage the LLC for you.
• Separate record-keeping: You can open a separate business account using your LLC to manage your finances better and keep separate records for business operations.
• Professional appearance: Operating a rental property through a business entity makes your rental feel more professional to its tenants and prospective tenants.

While LLCs have many benefits for owning and operating a rental property, they don’t come without their downsides. Here are the potential disadvantages of forming an LLC for your rental property:

• Formation fees and costs: Each state charges a filing fee and may charge additional fees, such as an annual renewal fee or a franchise tax. Make sure you understand your state’s specific requirements before filing.
• More requirements: When compared to a sole proprietorship, an LLC may be required to file additional paperwork, maintain an operating agreement and adhere to potential reporting requirements such as tax compliance.
• Personal guarantees: Even though LLCs offer limited liability, there are cases when a business owner will have to personally guarantee a loan, credit card or something similar.

Overall, however, it is still a good idea to form an LLC for your rental property because it provides limited liability protection.