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This guide will explain how an LLC can become a protective mechanism for your rental property and how you can form an LLC in minutes.
What is an LLC?
If you’re completely new to the world of business structures, here’s a rundown of what an LLC is.
Let’s start off with that—when you officially form a business, you have to choose what kind of business structure it’ll be.
A business structure is what’s used by the government and the IRS to classify and tax your enterprise.
There are a few to choose from, each one is different. The variety is there so that each business can choose the best suited option to keep their tax and maintenance requirements fair and not excessive.
This makes sense. For example, Amazon has nothing to do with your local, family-owned bakery. An established business can afford higher maintenance costs, and needs more structure. A small business needs more flexibility and low costs.
So, there are multiple business structures and an LLC is one of them. An LLC is a fairly flexible business structure that provides limited liability and pass-through taxation.
Pass-through taxation means that the LLC doesn’t pay tax, it passes the profits and losses onto the members (owners/shareholders) and they pay tax.
Forming an LLC for Rental Properties
Each rental property you own is a business. It has expenses and it brings you profit.
Forming an LLC for your rental properties will give you protection and keep your finances organized. Let’s take a look at the benefits in more detail.
Limited Liability Protection
Protect yourself from losing your properties.
If you manage your rental properties as a sole proprietor, you’re not managing your risk. In case you run into personal debt, your properties can be used to fulfill your liabilities.
Once you open an LLC, your properties are separated from your personal assets and other businesses. Personal debts and liabilities will no longer put your properties at risk.
Separate the Properties from One Another
Minimize the risk.
You don’t want to bundle up all of your rental properties under one LLC either. In case you get into any financial troubles with one of them, you don’t want the rest to be affected.
Your best route is to separate each one under individual LLCs.
This way they’re safe from each other and your personal liabilities.
Keep favorable tax rates.
As mentioned above, pass-through taxation means the LLCs profits will be taxed at the personal income level of the member(s).
So, for example, if you and your partner are both registered as the members, the profits will be divided into two, and you’ll each pay tax on your share.
This is a huge advantage. If you were to register your business as a corporation, you’d pay tax twice on your profits. Once as corporation tax, and once as personal tax on whatever you’d pay yourself.
Drawbacks of LLCs
Now that you understand why forming an LLC for your rental properties is a good option, let’s look at some downsides you should consider.
Each LLC is going to cost you money to set up. The costs vary from state to state. It can be anywhere from $50 to $500.
You’ll have to form in the state where your property is located, so you don’t have many options to minimize the set up cost.
Luckily, setting up an LLC is affordable in most states, only a few go above $200.
Beyond the formation costs, you might also have to pay a name registration fee and a publishing fee.
There are annual maintenance fees for LLCs, they also vary from state to state. Similarly to formation costs, you can expect to pay somewhere between $50 and $500 and some states don’t require annual filing at all.
How to Incorporate an LLC
Setting up your LLC is pretty straightforward, especially if you go with a service designed to speed up the process for you.
We have created a modern platform that allows you to setup an LLC in minutes, all done online.
Step 1: Choose Your Package
See our pricing and choose the package that suits your needs.
Our pricing is transparent. The price you see is what you’ll pay at checkout. We don’t add any fees later during the process.
Step 2: Register and Provide Your Details
All you have to do is fill out a form that takes a few minutes to complete.
We will ask you for the required information to file with your state, and then we’ll use that information to form the LLC for you.
Step 3: Pay the Fee
Use our secure payment gateway to cover the package fee. As soon as you pay we’ll start processing your LLC formation.
Step 4: Receive Your Formation Documents!
All done. You can access your documents from our dashboard at any time. You will also receive your documents by mail.