Why You Need an LLC for Your Rental Properties

Introduction to LLCs and Rentals

Housing is a commodity that's always in need, which is why rentals can be a great investment. If you can get a quality tenant in your property, not only could you get the mortgage paid off quickly, you might also be able to put some extra income in your pocket. However, while there are benefits to being a landlord, you could also be putting yourself at significant risk when things don't go right.

States and local municipalities enact housing codes to ensure a minimum standard for acceptable dwellings, but compliance with these laws doesn't keep you entirely safe. To give yourself an extra layer of protection, you should invest in complete insurance coverage. According to the American Apartment Owners Association, you should make sure your insurer covers you for several different circumstances:

Theft by tenants and employees
Catastrophic situations such as fire and storm damage
Liability for injuries to employees and tenants
Loss of rental income
Vandalism and malicious damage by tenants
Discrimination lawsuits
Fraud and other misrepresentation
Slander or libel against your residents
Claims above and beyond normal insurance limits

The Rentals and LLC Advantage

While insurance is a great place to start, it doesn't offer complete protection in the event of a lawsuit, and the fallout from litigation depends on the way you structure your business. As a landlord, you have a few different options for company organization, and they all have their advantages and disadvantages.

Many owners of rental property choose to go the route of sole proprietorship, which generally offers the path of least resistance. To structure your business this way, you usually need to comply with local regulations and file for the appropriate permits and licenses. Another similar option is a DBA, which stands for "doing business as." This arrangement offers you anonymity by hiding your name behind a fictional business name. While these setups entail minimal effort on your part, you're personally on the hook for debts and lawsuits against your company, and that could cause you to lose assets such as your home, car or even life savings.

To protect your personal holdings against lawsuits and creditors, you should consider forming a Limited Liability Corporation (LLC). As an LLC, a judgment against your company won't go beyond the assets of the business unless the lawsuit stems from the result of your own personal misconduct or negligence. According to the Tax Foundation, you could also receive some benefits when it's time to do your taxes, as LLC owners can pay in a "pass through" fashion, which avoids double taxation on corporate and personal income. If you're interested in passing your property down to heirs, LLCs also make it much easier, as you can transfer interest in the company without drawing up new deeds and paying recording fees.

How and Where to File

Once you've made the decision to create an LLC for your rental property, the next step is to file the appropriate paperwork. While the forms and fees aren't as simple as they are for a sole proprietorship, there are services that will do the legwork for you. If you're interested in handling this undertaking yourself, the process involves a few different steps:Once you've made the decision to create an LLC for your rental property, the next step is to file the appropriate paperwork. While the forms and fees aren't as simple as they are for a sole proprietorship, there are services that will do the legwork for you. If you're interested in handling this undertaking yourself, the process involves a few different steps:

Pick a unique name for your company that complies with state rules and regulations.
Pay filing fees and submit the appropriate documents, such as articles of organization and an operating agreement.
Publish an intent notice (if required in your state).
Secure permits and licenses.

Now that you have an overview of the process, you should think hard about the state where you wish to set up your LLC. If you're operating as a local company, this is an easy answer, as you must register in the state where you're transacting business. For landlords who rent property in multiple states, it's best to consult an attorney or LLC registration service for further guidance.

Alternatives to LLCs

You might think an LLC is too much of a hassle for your small rental operation, so consider some of the alternative steps you can take to protect yourself and weigh the costs. Since your personal assets could be at risk in lawsuits or liens, insurance is the most important barrier you can procure buy. Before you agree on a policy, you should look at every factor, from deductibles to limits on coverage, as anything not paid for by your insurer will come out of your own pockets.

Managers are also helpful barriers against lawsuits, as a manager can help head off many of the common causes for lawsuits according to property management software company LandlordStation. If you've hired a company to handle your properties for you, it's that firm's job to make sure everything is above-board and immediately alert you to any potential issues. You'll pay for this protection, as the standard charge is usually 10 percent of the monthly lease payment and the first month's rent if you have the manager find your tenant.

A Smarter Way to Rent Out Property

No matter if you own an entire apartment building or you have a single property for rent, you can make some significant income as a landlord, provided you minimize your exposure to risk. Why leave yourself personally liable for lawsuits and other liabilities when an LLC provides a way to legally differentiate yourself from your business? While insurance is a great start, a limited liability company is the best way to keep a tenant or creditor from going after your residence, car or savings account.

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