Why Create an LLC for a Rental Residence?

by Rob Jennings J.D.
Running your rental operation through an LLC offers significant protections

Running your rental operation through an LLC offers significant protections

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Many small business owners choose to organize their businesses as limited liability companies (LLCs). The LLC form offers the benefits of limited liability and pass-through taxation like an S corporation but is easier to set up and maintain. If you own rental properties free of liens, you may want to consider organizing each one under an LLC. While not every landlord can benefit from creating an LLC, doing so can provide important protections for your properties and your other personal assets.

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Liability for Agents and Employees

Consider organizing an LLC for a specific property if you will be using a property manager or caretaker to manage the property for you. Anyone who works on the property in any capacity will be considered as your personal agent for the purposes of a lawsuit, so if they do something that results in damages to other parties they can expose your personal assets to the claims of plaintiffs. If your rental property belongs to an LLC, however, the people working on it will be considered company employees. While the LLC itself can be held liable, exposing the property itself to tort claims, it can shield your personal assets and other rental properties from these same claims.

Liability for Co-owners

LLC status can also insulate your other properties and personal assets from wrongs committed by any co-owners of the property. Company officers can always be held liable for their own acts, but in a general partnership — which you will be if you own your rental property with one or more other people — you can be held liable for your co-owners' acts, too. An LLC offers the same limited liability shield against the torts of your co-owners as those of your property managers or workmen. This can be invaluable in cases where you may simply be a passive investor and play no role in the day-to-day management of the property.

Asset Protection

LLCs can protect your personal assets from claims generated in the course of business by your co-owners, but they can also protect the rental property itself from the claims of creditors outside of the course of business. If you and your partners own the property without an LLC, a judgment creditor of any partner can force the sale of the property to satisfy the judgment. In many states, however, a judgment creditor's rights against an LLC are limited to the debtor's distributions from the business, not his interest in the business itself. Consider forming an LLC to hold your rental property if you don't want your operations interrupted by a partner's nonbusiness financial failures.

Ease of Creation

One compelling reason for putting your rental property in an LLC is that you can secure all of these advantages relatively easily. If you don't want to pay a lawyer to create an LLC for you, you can purchase state-specific forms online; some states, such as North Carolina, actually make these forms available to you for free. You can maintain your LLC status by filing a simple annual report and paying the associated fee.