There are several benefits to creating an LLC for your rental properties, including the separation of assets and limiting your personal liability.
In this article we detail everything that landlords need to know about creating an LLC for their rental properties.
What is an LLC?
An LLC, or Limited Liability Company, is a corporate business structure whereby one or more people who are “members” in the LLC are its owners.
You can create a Single Member LLC if you are the sole owner, or you can partner up with others to create an LLC for your business venture.
LLCs are regulated at the state level and are typically set up for the purpose of owning business assets due to the benefits that come with doing so.
Can Landlords Create LLCs for Rental Properties?
Yes, landlords can create LLCs for the sole purpose of owning rental properties.
While anyone can do so on their own and reap the same benefits, LLCs are a great way to own property with partners.
Creating an LLC with partners is one of the best ways to clearly establish and divide ownership. The required creation of an LLC operating agreement helps to further spell out the rights and responsibilities of the LLC’s partners.
The Benefits of Creating an LLC for Rental Properties
If you are relatively new to real estate investing, you may have heard from more experienced investors that you should create an LLC for your rental prpoerties.
That is because there are several significant benefits for landlords that do so:
LLCs Limit Your Personal Liability
This is one of the business world’s top best-practice fundamental concepts – separate your assets into different legal entities to limit liability from one spilling over to others.
By creating an LLC to own your rental properties, you are separating them from your personal assets. This means that if anyone makes a claim against your property they would have to make a claim against the LLC and not you personally.
Since the LLC only owns rental properties, your personal assets would be protected from liability and your exposure would be limited only to the assets owned by the LLC in question.
Clear Separation of Assets
An LLC allows you to keep your personal finances separate from your business ones so that you can keep better track. This also makes it much easier to claim business expenses, especially when you create separate bank accounts for your LLCs.
In addition, you can create a separate LLC for each of your rental properties. Doing so does have some considerations such as added cost and additional administrative work, but the benefit here is that you can maximize the isolation of your rentals.
Aside from protecting your personal assets, creating a separate LLC for each property limits the liability that one property can spill over to the others.
Pass Through Taxation of Income
An LLC is a type of corporation. With some types of corporations there is a concept called “double taxation”, which means that the corporation pays income taxes at the corporate level, and then the individual shareholders pay personal income taxes on any profits distributed to them.
An LLC allows its members to pass the corporate income down to its members before it gets taxed, thus avoiding the corporate tax and therefore double taxation.
The income generated by the LLC can be proportionally added to the personal income of its members, lowering what you would otherwise effectively pay in taxes.
Should LLCs be Created Before or After Purchasing Property?
While you can create an LLC after purchasing a property and transfer the property to the LLC, there are clear benefits to establishing the LLC prior to purchasing the property.
By purchasing the property in the LLCs name, the property title will belong to the LLC, which will be named as the owner in the property deed, and you would avoid having to do a title transfer to the LLC.
When transferring title, you will need to notify your tenants and more importantly your mortgage holder, which may result in them needing to issue you a new loan.
In addition, you may be exposing yourself to title transfer taxes and fees in your state.
But even if you purchased a property in your name initially, transferring it to an LLC will give you all of the benefits of doing so, despite these considerations.
If you need to transfer title to an LLC you can do so with a Quit Claim Deed.
How to Transfer Your Property to an LLC
If you purchased a property without an LLC, the property’s title, or ownership rights, is in your name. As part of the property’s title, the property deed, which is the legal document that defines the ownership of the property, lists you personally as the owner.
Having your name in the deed is what makes you personally liable for claims against the property, and replacing your name with the LLC in the property deed is how this liability is transferred to the LLC and protects you personally.
In order to transfer the property to an LLC you must file a Quit Claim Deed, listing yourself as the “Grantor” and the LLC as the “Grantee”. The process of doing so varies by state but typically involves filling out the deed, having it notarized and filed with the county in which the property is located.
Landlords that use Zuby’s legal documents feature have the ability to easily create their own Quit Claim Deeds.
However, we recommend carefully understanding your state’s laws or consulting with a lawyer to determine if you would have to pay a title transfer tax as part of filing the Quit Claim Deed.
Contact Your Lender if You Want to Transfer Title to LLC
If you have a mortgage on the property, we also recommend consulting with your lender prior to transferring the title to an LLC. The name on the mortgage needs to match the name on the deed, so you will need to coordinate with your lender.
Depending on the property, lender, and local regulations, some mortgage lenders require landlords to establish LLCs for their rental properties prior to receiving funding.
Does it Cost Money to Create an LLC?
Yes, depending on the state you are in, you will have to pay various fees for creating an LLC. How much exactly and the recurrence will depend on your state, so we recommend investigating this prior to creating the LLC.
The potential costs of creating an LLC may include:
- Registration fee – varies between $50-$700
- Creating an operation agreement – could be free if done yourself, or you can pay someone to create it for you
- Title transfer tax – pay close attention to this one, as you might need to pay the title transfer tax for the appreciation in the value of your property as well
- Quit Claim Deed filing fee – if applicable
Depending on your state, you might also have to pay recurring annual fees such as franchise taxes, registration fees, or annual report filing fees.
Naming an LLC for a Rental Property
You can choose any name that you would like for your LLC, as long as it is not already taken in your state. Search your state secretary’s webpage to see if a name you want is available.
LLCs for rental properties are commonly named after the street address of the property since it is easy to remember, will be recognizable to your renters, and it’s unique so it likely won’t already be in use.
How to Create an LLC for a Rental Property
While the exact process of creating an LLC is different by state, there are several common steps to keep in mind when creating an LLC for your rental properties:
- If you already own the property and want to transfer it to an LLC:
- Check your state’s taxes and fees of doing so
- If you have a mortgage, contact your lender and consult with them on your ability to do so
- Choose a name for your LLC and check it’s availability in your state
- Create your LLC’s documentation
- Operating Agreement stating the rights and responsibilities of all members of the LLC. This step applies to single-member LLCs as well.
- Articles of Organization for your LLC
- Any business licenses or permits for rental property LLCs according to local regulations
- File to register the LLC in your state with all of the required documentation
- If you need to transfer title, file a Quit Claim Deed with your county
- Create a bank account for your LLC and change to the name of your LLC in all leases and other legal contracts for your rental property
Final Remarks from Zuby
As a landlord, creating an LLC for your rental properties has many benefits and should be seriously considered.
Creating an LLC for your rentals will not only limit your personal liability, but it is also a big step towards professionalizing your rental operation.
Another way to professional your rental operation is to stay organized and use a property management app like Zuby, which allows you to collect rent online, screen renters, create your own leases (and Quit Claim Deeds), order maintenance pros and much more.