What business entity is best for holding property?
Limited liability company (LLC)
- It provides anonymity. As the legal property owner, the LLC is often listed on the property title, financial contracts, and rental agreements.
- As a separate legal entity, the LLC shields the owners’ personal assets from being seized if the rental business runs into legal issues. Instead, only assets under the LLC’s ownership are subject to any such legal claims.
- It eases the process of property distribution after you pass away. Beneficiaries simply receive a certificate to prove their stake in the property.
- Money lenders and insurance companies may offer different contracts to an LLC than to an individual homeowner. For instance, as a company, you may qualify for more insurance coverage or low-interest-rate loans.
- It has a flexible tax status. If you meet certain criteria (e.g., single- or multi-member LLC), you can apply to have your company taxed as a corporation, a partnership, or a “disregarded entity”. (Note that some LLC members may need to pay self-employment tax.) If your LLC has high earnings, you may also be able to take advantage of corporate tax savings. Review your state’s LLC laws to see what applies to you.
- Multiple LLCs can help separate your liability between properties. So, if a lawsuit targets one property, it can only pursue the assets owned by that particular LLC. Besides, banks typically prefer separate LLCs to ensure that one property doesn’t negatively impact another property that they’re tied to.
However, if you’re planning to build or flip several properties, you may want to incorporate your business instead.
- Personal liability protection
- Corporate loan agreements
- Business tax deductions
What are the drawbacks of forming a real estate company?
- There are fees to form a corporation or LLC in your state, including the recurring expenses that some states require for these structures. (However, many landlords find these initial costs worth the protection they’ll get from the company in the long term.)
- You’ll need to do some paperwork to start your company legally, plus some more paperwork to make managing the company easier... and potentially more paperwork as you continue your daily operations. (But you can take advantage of a document-building service like LawDepot to automate and simplify this process!)
- Your tax situation may get a little more complicated. Depending on your company structure, you may have to pay taxes twice: corporate taxes and personal taxes. (It helps to hire a professional to find the best structure for your business when it comes to saving money on taxes.)
- State and federal laws may regulate how you do business. For instance, federal laws require public companies to disclose certain details about their business. In addition to that, state laws may regulate how an LLC can enforce their landlord rights. For example, a landlord typically cannot represent their LLC in court during an eviction lawsuit (as this would be an unauthorized practice of law). Instead, the LLC must hire an attorney to argue the case.
How to transfer a property title to your company
What other ways can a landlord limit liability?
- Landlord Insurance: Umbrella insurance policies add an extra layer of protection and cover liabilities such as vandalism, flood, and fire damage.
- Living Trust: Trust assets are meant for a beneficiary to inherit at a later point in time. Any claimants targeting a trust beneficiary typically can’t pursue these assets because they don’t belong to the beneficiary yet.