5 Reasons To Form An LLC For Your Rental Property
If you own rental property or are thinking about buying rental property, you may wonder whether it is best to keep the property in your own name or contain it within an LLC. For several reasons, it could benefit you in the long run to create an LLC for your property. An LLC (Limited Liability Company) is a business entity combining aspects of a corporation, partnership and sole proprietorship. An LLC is generally less complex than corporations or other formations, and offers benefits they may not be available within other types of businesses. They can be especially useful for purposes of property ownership, for reasons including:
- Protection from Personal Liability. Even if you have property insurance and liability coverage, that may not sufficiently protect you. If someone is seriously injured on your property due to some type of alleged negligence, they can sue you personally for damages beyond your policy limits. If the property is owned by an LLC, however, your personal assets are protected while the LLC bears the brunt of any financial liability. After forming an LLC for the property, leases should name the LLC as the Lessor, rent should be paid directly to the LLC, and deposits should be made to the LLC’s separate bank account. If you own multiple rental properties, a separate LLC should be created for each property to shield each one from the potential liabilities of another.
- Simplified and Flexible Business Structure. LLCs are among the least complex business structures to form and maintain. LLCs may be formed for any legitimate business purpose, and combine the liability protection of a corporation with the flexibility of a partnership. In New York, the owner or owners of an LLC are designated as members, and any member can manage the day-to-day affairs of the company. New York requires that certain requirements be met at the outset, such as filing the Articles of Organization for a New York LLC and publishing notice of the Articles of Organization.
- Help with the Mortgage Process. If you are financing your rental property, the lender may require or advise that you place the property in an LLC. This limits liability for you as the owner and the bank as the lienholder. Showing the lender that you’ve already “done your homework” on this issue can simplify the financing process and save time for both parties.
- Pass-Through Taxation. An LLC is a “pass-through” entity for tax purposes, meaning that any income derived or losses paid will be reported on the owner’s personal income taxes. The IRS considers LLCs the same as a sole proprietorship or partnership, which saves the owner time and money during tax season. This also avoids problems with double taxation, regulations, and other issues that corporations typically face.
- Maintaining a Professional Business Appearance. Operating real property as an LLC has practical benefits outside of the technical ones. The LLC will show potential tenants, lenders, vendors, and potential business partners that you are serious about the property and have a keen business sense.
Our New York Real Estate Attorneys Can Discuss Options and Help You Form an LLC for Your Rental Property
You are not required to use a lawyer to form an LLC in New York. However, Articles of Organization and Operating Agreements create legally enforceable rights and responsibilities for the property owner. Failure to plan carefully now can create pitfalls and potential legal headaches in the future. Additionally, our Bronx and New Rochelle real estate attorneys bring decades of experience dealing with these issues, and can help you navigate the process in a pain-free and productive manner. Contact us today for help.