A limited liability company, or LLC, is one type of business structure available to your rental business. Although you can own rental property without such a business structure, an LLC offers liability protection so that you can keep your personal and business assets separated. To form an LLC, you must file certain paperwork with your state.
Decide Whether an LLC Is Right for You
Limited liability companies are not the only way to own rental property; you can own it as a sole proprietor, corporation, partnership or another business structure. However, an LLC is one of the business structures that offers liability protection so that only business assets are liable for business debts. If you own your rental property in an LLC, your personal assets typically cannot be taken to pay the rental property's debts. LLCs also offer tax benefits by allowing you to pass the tax consequences of your rental property on to your personal taxes. This avoids double-taxation, which often occurs with corporate ownership.
Choose a Business Name
Before you officially form your LLC by filing with your state, you must select a name for you company. States have specific laws addressing possible names and will not accept your paperwork unless your business's name complies with those laws. Typically, the name of your business name must be different from other LLCs already existing in your state. It must also indicate that your business's structure is an LLC, something you can accomplish this by including the abbreviation "LLC" in the name. Your state may also have a list of words that your business's name cannot include, such as bank or insurance, because these words could mislead the public. In most states, you can check your name through the secretary of state's office or whatever state office handles new business registrations.
File the Articles of Organization
Once you decide that you want to create an LLC and have chosen a business name, you must file an organization document with your state's business registration office. This document, often called the articles of organization, provides basic information about your LLC, such as the business's name, address, registered agent and the names of the business owners, called members. States typically charge a fee for registering your articles. Your LLC is not officially created until the state accepts this document.
Create an Operating Agreement
While your articles of organization legally form your LLC, you can create an extra document, called an operating agreement, to describe the details of how you and the other members of your LLC intend to operate your business. For example, if one member will manage the business by overseeing the day-to-day rental operations, you can spell that out in the agreement. You can also describe how you intend to handle disagreements between members and how you plan to split the rental proceeds and expenses. You do not have to file the operating agreement with the state.