LLC for rental property - FAQ

LLC for rental property

An LLC is a separate business entity formed according to state statute.  While it functions as a legal company and if run correctly has the same asset protection as a regular corporation, it is much less cumbersome to operate in terms of statutory requirements. The individual owners of an LLC are called “members,” and most states do not restrict the type of ownership or the number of members. Members of an LLC can be corporations, other LLCs, foreign entities, and/or individuals. 

One of the most popular reason to form an LLC in Colorado is because you can create an LLC as a “single-member” LLC with just one owner. Many people who own rental property choose to house their investment in this legal structure. Rather than holding rental property as a sole proprietorship as an individual, a real estate investor may consider forming a single-member LLC to hold investment property. LLCs also allow more then one investor to buy or manage a property together with a simple operating agreement ( a must to avoid conflict) delineating the agreement.

The Pros of “housing” your rental property in an LLC structure:

·       LLCs are business entities distinct from the members and are easier and less expensive to create and manage compared to a corporation.

·       An LLC can generally have an unlimited number of members, which may make an LLC a good vehicle to consider for group investing.

·       Members of an LLC may provide equity capital, debt financing in the form of a loan to an LLC, or a combination of both.

·       Single-member LLCs may be formed to hold rental property as an alternative to owning property in a personal name or “doing business as” (DBA) name, thereby protecting the owner’s other assets from liability for the rental property.

·       Income or losses from a rental property held in an LLC are passed through to each member and reported on individual tax returns, with income taxes paid based on each member’s individual rate, avoiding the double taxation of corporate profits.

·       Other business and personal assets of each member are generally protected from legal liability or creditor claims in the event of a lawsuit or bankruptcy.

·       Members of an LLC also may buy and sell their individual shares without having to sell the actual rental property, based on the rules outlined in an LLC’s operating agreement.

The Cons of “housing” your rental property in an LLC structure:

·       LLCs must file annual tax returns (even though LLCs generally do not pay taxes) and provide each member with a Schedule K-1 to report each member’s share of income or losses, deductions, and credits.

·       Member liability protection from an LLC may be limited if an LLC is proven to have done something illegal or if the LLC does not adhere to recommended practices, such as not comingling personal funds.

·       While individual members of an LLC may be able to sell their shares, some states require an existing LLC to be dissolved and a new LLC to be formed if there is a change in membership (not Colorado).

·       Raising additional capital may also be more difficult with an LLC structure, compared to a corporation, such as an S Corporation, which may sell shares of additional stock rather than taking out a bank loan.

I enjoy helping start their businesses and am happy to consult about whether an LLC is a good fit for your business venture. It’s always exciting to hear about new companies and I am happy to discuss the legal requirements and answer questions. You can schedule a quick complimentary consult here.