Owning and managing a rental property or a number of properties is, at the core of it, a business. You have made an investment and expect it to reap returns. Businesses have structures and your business – the rental property that you are running – will normally be a sole proprietorship type business. You are the sole owner and represent the business in every way. All business related debts will affect you personally and your private property can be taken by creditors.
Limited Liability Companies (LLC)
The first and most important difference between a sole proprietorship and an LLC is that, in an LLC the business is its own legal entity and that the business’ debts will not affect the owner’s private properties.
Advantages of an LLC
By setting up an LLC, you are essentially forming a company that runs a real estate business. There are many reasons why this will work for you, including the fact that you will own a company. Apart from a few exceptional cases, your personal home and savings should not be affected if at all you encounter serious losses and end up owing money because of the business. Also, if a tenant or anyone else involved with the business decides to sue you, your personal property will remain unaffected. Tax breaks are also aplenty for a LLC, against you running it by yourself. There are exceptions on pass through tax, reduced self employment tax and the absence of double taxation. Another advantage is the simple transfer of ownership, in case you want out of the business.
Disadvantages of LLC businesses
There are an equal number of disadvantages
- Cost – LLCs are companies, so there is a cost for setup, running, and a number of fees, but the insurance normally costs a bit less.
- Formal business – The company has to run with a set of formalities in mind, there is a lot of paperwork that has to be kept in place. Records have to be maintained as a separate entity, and personal affairs, should, in no way mingle with company records or money.
The advantages and disadvantages are clear so consider your current state, the number of rentals you own, your long term goals, plans and financing options carefully before jumping in.