If you’re starting a real estate rental business, you may be interested in forming a limited liability company (LLC). The LLC is an incredibly popular business structure for many different types of businesses, including real estate.
An LLC is easier and cheaper to form than a corporation, it provides limited liability protection that you won’t receive as a sole proprietorship or general partnership, and it allows you to choose the way you want your business to be taxed.
But is the LLC the right choice for real estate rental properties? And if so, should you form one LLC that encompasses all of your properties, or should you create separate LLCs for each property? Also, what role do series LLCs play in this conversation?
In this guide, we’ll discuss all the relevant details of real estate LLCs in an effort to help you answer all of these questions and more.
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What Is a Real Estate LLC?
A real estate LLC is a formal business entity that protects the personal liability of its owner(s) in case the business is sued.
There are a few different ways these businesses can function. You can either use one LLC for all of your properties, create separate LLCs for each one, or form a series LLC (where permissible) to maintain separate LLC segments under one umbrella company.
In our opinion, rental real estate properties should definitely form an LLC. Rental properties have considerable liability risks, and the LLC does an excellent job of shielding you as a business owner from taking on those liabilities yourself.
Let’s talk a bit more about why the LLC is such a great fit for rental properties, as well as which of the three options — one overarching LLC, separate LLCs, or a series LLC — is the best choice.
Why Is the LLC the Right Choice for Rental Real Estate?
As we already mentioned briefly, the LLC protects your personal assets. If you own rental properties, this protection could make a massive difference. Let’s say that you have a rental property with a rooftop balcony, and your tenant falls off of that balcony. It’s not unlikely at all that this individual would choose to sue your business for not providing a safe environment.
If you have an LLC, that tenant can only sue you for your business assets. However, if you simply own the property as a sole proprietor, the tenant can also sue you for your own personal assets, like your home, car, personal bank accounts, etc.
On the other hand, corporations also provide this same asset protection, so what sets the LLC apart? One major advantage of the LLC for a real estate business is the flexible taxation awarded to LLCs. The default method of taxation for an LLC helps its owner(s) avoid the “double taxation” paid by most corporations. (Double taxation is when the corporation itself pays taxes on the corporate level, and then the shareholders also pay taxes on their dividends, thus taxing the same money twice.)
With the pass-through method used by most real estate LLCs, there is no corporate-level tax, as taxes are only paid by the LLC’s member/owners on their personal returns. In addition, the Internal Revenue Service allows real estate LLCs to deduct rental property mortgages and loans taken out for the purpose of property improvements as business expenses, which can also save owners a considerable amount of money.
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Should I Form One LLC, Multiple LLCs, or a Series LLC?
In our opinion, forming multiple LLCs or a series LLC is far preferable to forming one LLC for all of your rental properties. This allows you to insulate each property in your portfolio from the others from a liability standpoint, which allows you to minimize risk in case there’s a lawsuit involving one individual property.
A series LLC is a collection of LLCs that operates under the umbrella of a master LLC. While each LLC in the series is part of the larger company, this business structure also keeps each LLC financially insulated from the others.
This is our preferred option for rental real estate, as it gives you the best of both worlds regarding one parent company and separate LLC segments for each property, but the series LLC is only available in 20 states:
Alabama, Arkansas, Delaware, Illinois, Indiana, Iowa, Kansas, Minnesota*, Missouri, Montana, Nevada, North Dakota*, Oklahoma, South Dakota, Tennessee, Texas, Utah, Virginia, Wisconsin*, and Wyoming, along with the District of Columbia and Puerto Rico.
*Series LLCs in these states share liability among segments and are therefore not recommended
If your business operates in a state which does not recognize the series LLC, or if you want to use a more time-tested and legally consistent entity, then we prefer to create a separate LLC for each of your rental properties. While this can be a hassle compared to the other options, we’re not huge fans of grouping all of your properties into one LLC, because they will all share liability.
When Should I Form My Real Estate LLC?
It’s important to form your real estate LLC before your company ever begins the process of transacting business, because if you start conducting business before forming your LLC, your early transactions will not be covered by the LLC’s “corporate veil,” which is the layer of protection between your business assets and your personal assets.
In addition, it’s often simpler to complete real estate transactions through an already-existing LLC than it is to transfer it later.
This is another reason to form your LLC before you ever start acquiring real estate, as it is typically more difficult to transfer ownership of a property from a sole proprietorship or a general partnership to an LLC, because a lender will likely have to consent to that transfer. It’s not that this is particularly difficult, but it’s one more easily avoided hoop to jump through.
How Do I Form an LLC for My Rental Properties?
If you read our comprehensive guide to series LLCs, you’ll find our step-by-step instructions for forming a series LLC. Likewise, our “Starting an LLC for Real Estate” article breaks down the ins and outs of forming real estate LLCs and our comparison guide between series LLCs and traditional LLCs can help you choose the right entity for your business.
If you want to use a service to form your LLC, there are dozens of options. We invite you to check out our full list of the best available LLC formation services, but we’ll also share a couple of the most popular options below. ZenBusiness is the best LLC formation service available. That said, ZenBusiness receives outstanding customer feedback, with more than 9,800 reviews available online and very few negative reviews among them. For most people, LegalZoom is the first name that comes to mind for LLC services due to their massive advertising budget. LegalZoom’s pricing and features may not compete on an equal playing field with ZenBusiness, but its brand power is notable and it receives good customer reviews. For a side by side comparison, check out our LegalZoom vs ZenBusiness review.
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If you want to use a service to form your LLC, there are dozens of options. We invite you to check out our full list of the best available LLC formation services, but we’ll also share a couple of the most popular options below.
ZenBusiness is the best LLC formation service available. That said, ZenBusiness receives outstanding customer feedback, with more than 9,800 reviews available online and very few negative reviews among them.
For most people, LegalZoom is the first name that comes to mind for LLC services due to their massive advertising budget. LegalZoom’s pricing and features may not compete on an equal playing field with ZenBusiness, but its brand power is notable and it receives good customer reviews.
For a side by side comparison, check out our LegalZoom vs ZenBusiness review.
Frequently Asked Questions
When Is the Best Time to Start an LLC?
We think you should start an LLC before you begin conducting business. While it is entirely legally acceptable to operate your business as a sole proprietorship or general partnership before forming an LLC, doing so subjects you to a number of risks that LLCs don’t have to worry about.
For example, informal business structures don’t have limited liability protection, so any lawsuit filed against the business can include the owner’s personal assets as well as the business assets.
Should I Use an LLC Service, Hire an Attorney, or Form My Own LLC?
The answer to this question lies in your personal preferences, but we can give some general pointers. An attorney will cost the most by a mile, but also provides expertise you won’t find with the other options. The DIY route is free of charge but can require quite a bit of legwork and provides no peace of mind that the process is being completed correctly.
Using an LLC service means your business will be formed by professionals who know what they’re doing, while also costing significantly less than a lawyer. This “best of both worlds” attribute is what makes LLC services our preferred option.
How Do Online LLC Services Work?
Using an online LLC service removes much of the hassle from the business formation process. With these services, all you need to do is provide them with the name, location, and industry your business operates in, along with some info about yourself and your registered agent.
The service then creates your articles of organization and files them with your state to create your new LLC.
Are LLC Formation Websites Legit?
Absolutely. There are quite a few reputable companies offering LLC formation services these days, including the three best LLC services we discussed earlier.
In fact, while we certainly have our opinions about which ones offer the best pricing and features, every one of the incorporation services we discuss on this website is entirely legitimate and trustworthy.
Does Using an LLC Service Give Me More Legal Protection or Privacy?
In some ways, using an LLC service does protect your privacy, especially if you choose to also have that company serve as your registered agent.
This is due to the fact that, if you serve as your own registered agent, your personal address will often become part of the public record. Using a registered agent service not only provides the privacy of using the agent’s business address as your own, but it also significantly cuts down on junk mail.
This is why we’re such big fans of companies like Northwest Registered Agent that include a year of registered agent service with their LLC formation packages.
Should I Form an LLC or Corporation?
This is an impossible question to answer in an across-the-board manner, as each business type has its own advantages and disadvantages. That said, the LLC is typically the more suitable option for small businesses and solo entrepreneurs, while the corporation is usually a better fit for large companies. For more info, check out our complete comparison guide between LLCs and corporations.
In short, yes, we do think you need an LLC for your rental real estate properties. The bigger question in our opinion is which kind of LLC you should form. We think the best option is to either form a series LLC (if you operate your business in a state that allows them) or to form separate LLCs for each rental property.
With either of these options, each of your properties is isolated from the others for liability purposes. Forming one LLC is still better than not forming one at all, but it’s highly preferable to go with a series LLC or multiple LLCs.
We hope this article helped you develop your understanding of forming LLCs for rental real estate properties!