Many landlords when just starting out will purchase a property and start renting. No problem right? Hopefully not, and probably not a big deal at first. As you get bigger, you start to hear people talking about their Limited Liability Corporations and how great they are. You start to wonder why you haven’t done that yet. They sound great. But just how good are they?
The Limited Liability Corporation
LLCs are a vehicle to hold and manage property. That’s not the 3rd party property management you’ve heard of, it’s more like asset management. The property is owned by the corporation, and the corporation is owned by the owner(s). Here are three benefits and three limitations. These are my favorites.
Benefits of LLCs
- Allows for multiple unrelated owners. Get together with some partners and you’ll need an LLC.
- Liability protection. This doesn’t mean you have no liabilities. Negligent and criminal actions will come back on the owners. Other liabilities are still present too. In fact, the limited part means only that the civil liability extends to the assets of the company and not onto the owners. That’s still a big benefit.
- Tax benefits. The taxes will pass through to the owners based on their ownership potential. The benefit here is really an advantage over other corporations, which can get taxed and then the owners are taxed again. This is called double taxation.
- You can call yourself a CEO.
Limitations of LLCs
- Costs money to set up. If you use an attorney, expect about $1,000. Without an attorney, which I don’t recommend, unless perhaps you are doing a single-member LLC, it’ll be about 1/4 of that.
- Costs money to maintain. Annual filing fees will be charged.
- More paperwork. That’s self-explanatory.
- You’ll be unable to obtain government-backed loans, like FHA, for the most part.
So, Should I Start an LLC?
In a word – yes. Any time you’ll be renting or doing anything that interacts with other humans, there is liability. It makes sense to limit this as much as possible.