So, do you need and LLC for a Rental Property? The short answer is no. As with most financial questions, though, the short answer is never adequate. It is wise to look at some of the advantages and disadvantages of a Limited Liability Company ("LLC") before determining what is best for you. First, you should consider the advantages:
Imagine for a moment that a renter falls down a staircase and suffers injuries. The renter may try to sue the property owner if he/she feels that the fall occurred due to a loose floorboard or some other lack of maintenance. If the property owner is an individual, that owner's personal assets would be exposed to the law suit. If the property is owned by a LLC, only the assets of the LLC would be exposed.
While a LLC will have some up-front expense, it is typically less than some other business structures.
A business structure will typically be seen as being stronger than an individual doing business in his/her own name. This is something that lending institutions, insurers and other industries look at when deciding whether or not to work with your business.
While you should speak with your personal tax adviser, generally, a LLC avoids corporate taxation and taxes are paid by the members on their personal income tax returns.
Second, you need to consider the disadvantages:
Potential Complex Tax Issues
There are taxation issues that can arise with a LLC such as taxation of non-managerial losses, state specific taxes for LLC's, self-employment taxes, etc. A tax expert can detail your specific situation.
If there are multiple members of the LLC, estate planning issues may arise when it comes to passing your interest to your heirs. Agreements may be made between the members prior to one passing away. Those agreements would likely have additional expense.
As stated earlier, there is no simple answer. Each individual should consider the pros and cons of forming a LLC for rental property. Seeking expert advise from an attorney and accountant is recommended.
The bottom line is that if a property owner is looking for a way to limit personal liabilities and wants to avoid the complexities of incorporating, a LLC could be a great way to go.