When you own rental property, you have a number of important decisions to make, including how to structure your business. One option is to form an LLC, or limited liability company. There are numerous reasons for forming an LLC, but there are also many drawbacks to doing so. Understanding the basics involved in forming an LLC can help you to determine whether this is the right business decision for you.
Protecting Your Personal Assets
Among the most important reasons for forming an LLC is to protect your personal assets. When you form an LLC, you will be personally protected from litigation. Your company could still be sued, but your personal assets would be protected.
While that is certainly a good reason for forming an LLC, you should also recognize that you will need to study some tax issues. LLCs are required to pass through taxation. This means that the LLC will not pay any taxes. Any income generated by your business will pass to the owners of the LLC. If you are a sole proprietor, this means you would report your taxes in the same manner in which you ordinarily would. In cases in which there is more than one owner, the LLC would be required to file a separate tax return. Not certain whether setting up an LLC would benefit you in terms of taxes? Schedule an appointment to discuss this with your tax advisor.
Forming an LLC Costs Money
Keep in mind that an LLC is not free. It will cost you money to set up an LLC. The state registration fee will typically range between $50 and $150. If you feel uncomfortable with handling it on your own, you could hire an attorney, but be prepared to pay at least $1,000 in legal fees. You should also be aware that depending on which state you live in; you may also be required to pay annual taxes or fees. California is one such state in which the filing fee to set up an LLC is fairly nominal, but the annual taxes can be quite hefty.
Insurance is vitally important when you own rental property. Landlord insurance protects your investment, and you may also choose to add a rider to your policy for loss of rental income. Umbrella insurance can also provide protection against litigation. As with most things in life, however, your insurance might not cover all your expenses in the event of a loss. This means your personal assets could be at risk. If your properties are protected with an LLC, however, your personal assets would be protected.
In the event that you do decide to set up an LLC, it is imperative that you never mix funds from your LLC with your personal funds. Doing so could cause you to lose your protection in the case of litigation.
The decision of whether or not to form a LLC can be highly personal. Everyone has a different situation. Now that you understand the basics of what is involved in an LLC, speak to your attorney or financial advisor to determine whether this is the right choice for you.
Published by your friends at VerticalRent