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Landlords: Benefits of Creating a Rental Property LLC

LandlordsWhether you own one or multiple rental properties, creating the Limited Liability Company (LLC) business structure for your rental property brings three main benefits.

  1. Personal Liability Protection
    Without an LLC, the owner’s personal assets are at risk if you are sued relating to an issue with your rental property.  With an LLC structure, only the assets owned by the LLC are subject to risk, thereby protecting the owner’s personal assets.  For example–if the rental property owner used a management company who was negligent in not fixing a deck that led to a court award in excess of the insurance limits, an LLC would shield the owner’s assets.
  2. Pass-Through Taxation
    Federally, an LLC is not a tax-paying entity—meaning the entity itself is not taxed, but rather, the income is passed through to the LLC’s members to be included on their personal income tax return.  Some states do tax LLCs at the entity level.  Virginia follows the Federal structure.
  3. Separation of Rental Properties
    When owning multiple properties, creating a separate LLC for each will shield all of the other rental properties from the liability claims against one of them.

Additional benefits include less profit-sharing restrictions for rental properties with more than one owner, a separation of personal and business expenses via separate bank accounts, better business-expense documentation and a better platform for producing property-specific financial statements.  In general, LLCs provide less record keeping, providing an ease of operation not found in other types of business entities.

For multiple owners, an operating agreement for the LLC delineates the rights and responsibilities of each LLC member.

Timing of LLC Creation
A rental property LLC can be created prior to purchase or at any time during ownership of the rental property.  Certain notifications need to be made if transferring the rental property to an LLC after the purchase.
For additional information on LLCs, see my July 29, 2014 blog, Business Entities: LLCs, on our website www.layman-nichols.com.  At Layman & Nichols, P.C., we can answer your questions about LLC formation and provide the guidelines and documents you need to reap the benefits of an LLC for your rental properties.

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