If you own or would like to purchase a rental property, then you may be considering whether to hold it in a limited liability company (LLC). There are pros and cons to creating a single member LLC, which you should be aware of before creating one.

That’s why we’ve created this article. It covers everything that you need to know about creating a rental property LLC for your property title and will tell you how to create an LLC if you decide to do so.

Let’s get started. 

What Is an LLC?

LLC is an acronym that stands for limited liability corporation. This is a type of busines ownership structure just like a corporation and a sole proprietorship are. 

Real estate investors may choose to hold personal assets like houses and apartments in a limited liability company for various tax benefits and asset protection reasons. We’ll cover these throughout the following sections.

The Main Benefits of an LLC

There are several major reasons why a business owner may choose to hold their rental properties in an LLC. Here are four reasons why this business structure could be right for you.

No Personal Liability (Liability Protection)

When you hold your investment property in a separate LLC, only the LLC’s assets are at risk if you encounter unexpected legal fees, mortgage payments, and other charges. It essentially means that if your real estate investing business goes bankrupt, your personal assets in your bank account won’t be at risk.

For example, you might see an unexpected loss in rental income for your rental business and no longer be able to pay contractors for work they completed. Your personal finances wouldn’t be at risk if something like this happened.

Pass-Through Taxation

You also won’t need to worry about double taxation or have to file a separate tax return with a tax professional if you have an LLC for your rental. This is called pass-through taxation. It means that property owners with an LLC will pay taxes for it through their personal tax returns.

The bottom line is that with pass-through taxation, you should see some tax benefits that your property management business may not receive if it was owned and operated by a single mortgage holder instead of an LLC with a business license. 

Separate Your Rental Properties

You can also form an LLC for each rental property that you hold. With one property deed per LLC, you can manage multiple properties without risking all of them as collateral if one of them fails.

For example, let’s say your business entity held all of its rental properties under one LLC. If one starts missing rent payments and rental leases, the people that you owe money to could collect it through liens against the other properties.

But when small business owners create a separate bank account and LLC for each property deed, they don’t have to worry about this. If one rental property purchase fails, it won’t impact your other rental properties with the local county clerk’s office.

Separate Business Expenses and Personal Expenses

Creating an LLC for your rental property also makes it a lot easier to manage your real estate finances. You will have separate bank accounts and separate bank statements for your real estate business and personal life.

This makes it easier to manage your LLC’s bank account, maintain a more professional business appearance, and accurately keep track of your business transactions as you need to do in order to comply with the mandates of property law.

Pros & Cons of Creating an LLC as a Rental Property Owner

We’ve covered the best reasons to form an LLC for your rental properties in the previous section. Now let’s look at some of the potential drawbacks before we go any further.

There Are Startup & Management Costs

Business structures like LLCs enable you to maintain an easily separate business without worrying about being held personally liable for issues. However, it takes some money to get an LLC started – both initially and long-term.

For example, you may need to purchase a different kind of liability insurance when creating an LLC. You will also have state filing fees to set up your business structure when creating an LLC operating agreement.

Finally, your rental business will also need to set up a designated registered agent when you create an LLC. This is the person who will act as the official point of legal contact for your property management company. You need a registered agent to avoid fees, fines, and additional tax consequences.

There’s More Paperwork

You will also likely be signing yourself up for more paperwork if you create an LLC. By doing so, you will need a separate tax identification number, a new homeowner’s insurance policy, and potentially even a new mortgage lender.

Plus, if you keep your bank accounts separate from one another, that’s more accounting and financial work for you to deal with as well.

You may be able to hire a property manager or real estate lawyer to help with some of this paperwork. But that’s an expense that would eat into your profits.

It May Be More Difficult to Get a Loan

Finally, it could be more challenging for you to get a loan to help cover your business expenses. Banks will only want to lend to a rental property that has a proven track record of success. If you have a fresh LLC bank account, you won’t have an easy way to prove that your rental property is a good investment without putting up your personal assets as collateral.

Considering an LLC for a Rental Property?

If you’re getting serious about putting your rental property into an LLC to avoid personal liability, then here are a few last pieces of information you need before getting started.

Setup Costs

You typically have to pay a fee to your state of about $100 per year to start an LLC. This can vary some based on where you’re located, and if you want to hire a company to help you do this, expect to pay them somewhere between $200-$500 for the service. 

You may even have to pay a title transfer tax and annual franchise tax as well.

Additional Paperwork

Creating an LLC will bring a major tax benefit to your property management business. But as a mortgage holder, you will have many new kinds of paperwork to deal with as well. That means either more work for your LLC members or an increase in your personal expenses from hiring help.

5 Basic Steps to Start an LLC for Rental Property 2023

Choose a Name for Your LLC

First, up is choosing a name for your LLC company so that you can provide it to the state with your sale clause or title transfer tax and your insurance company if necessary.

Any name will work as long as it’s relatively professional, so feel free to get creative.

Choose Your Registered Agent

The next step is picking a registered agent for your company. This is the person or company that will be the official point of contact for your LLC. You can do it yourself but it will bring a lot of additional responsibility to your life, which you may not want.

One thing to keep in mind is that if you’re going to use a third-party company to help create your LLC, then you may be able to get a free year of registered agent service from them for doing so. We’ll give you more detailed instructions on what that process looks like and some of our providers in a later section.

File Articles of Organization

The next step is filling out your articles of organization paperwork and then filing those with the appropriate state government organization where you live. 

You can typically find these documents online with a simple Google search, and file them either in person or through the mail (and potentially electronically). Or, you can hire a service to submit these for you if you prefer.

Create an LLC Operating Agreement

An operating agreement is a document that outlines how decisions are made in your LLC. You may not need to file this with your state in order to officially create an LLC. But it’s important to have so that it’s very clear who gets to make decisions for your business.

Obtaining an EIN

Finally, the last step is obtaining your LLC’s employer identification number (EIN). This is a number that will allow you to open bank accounts for your LLC and file taxes for it if you end up needing to do so.

The Top 2 LLC Services

Northwest

Northwest is an LLC formation service that can also help with various other aspects of your business, such as being your registered agent if you need one. 

The company will start your LLC for you at an affordable price. All that you’ll need to do is fill out the paperwork that they give you and pay the state filing fees. Then, Northwest will file everything for you and let you know as soon as your LLC formation process is finished.

The company routinely gets strong reviews from customers because it does everything at a high level and for an affordable price. It’s difficult to go wrong with Northwest.

Zenbusiness

Zenbusiness is another provider that should be on your list. It’s an extremely well-rounded LLC formation service that can also act as your registered agent, help with taxes and accounting, and provide you with resources that help you grow your business.

The company is a good partner to have if you’re serious about taking your rental property business to the next level. Customers enjoy using Zenbusiness because of its affordability and stand-out customer service. You’ll be able to access a Zenbusines customer support agent after regular business hours as well.

Final Thoughts

Starting an LLC for your rental property may introduce a little more work to your life. But doing so will protect your personal assets from the risk of collections if something goes wrong with one of your rental properties.

It’s impossible to predict the future. You’re better off doing a little extra work and making sure that you’re prepared for whatever it brings instead of crossing your fingers and simply hoping that everything will work out.

Both Northwest and Zenbusiness can help you create your LLC with minimal work. Connecting with either of them is a great first step towards taking care of this goal for your investments.

Frequently Asked Questions (FAQs)