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.
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 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.
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 16 states:
Alabama, Delaware, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nevada, North Dakota, Oklahoma, Tennessee, Texas, Utah, Wisconsin, and Wyoming, along with the District of Columbia and Puerto Rico.
If your business operates in a state which does not recognize the series LLC, 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 may 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.
If you would rather not go through the hassle of forming your own real estate LLC, you’re in luck. There are dozens of reputable online services that can save you a ton of time, while also costing far less than hiring a business lawyer to form your LLC. If you want to take a look at the top options, head on over to our guide to the seven best LLC services available.
In addition, we’ll briefly break down our top three options on this page. These are, in our opinion, the best options for real estate LLC formation service:
- ZenBusiness ($39): ZenBusiness truly has it all. They provide complete LLC formation service along with a full year of registered agent service for one incredibly low rate, and they also have stellar customer feedback. It’s hard to go wrong with an offer like this.
- Northwest Registered Agent ($225): Northwest is a bit more expensive than ZenBusiness, but their industry-best registered agent service (included at no extra charge) includes local scanning of every document they receive on your behalf. They also have the best customer support available for LLC formation services. If you’re looking for more of a premium service, Northwest is an excellent choice.
- IncFile (FREE): IncFile has an LLC formation package that is free of charge, as long as you pay your own state fee. That’s obviously an enticing offer, especially when you consider that they also provide a year of registered agent. Throw in their strong customer feedback, and IncFile is an excellent choice for LLC formations.
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!