Should you form an LLC if you own rental property? The decision to form an LLC is complicated and each landlord’s situation is different. The first LLC came into existence in the U.S. in 1977 in Wyoming, since then all 50 states have enacted LLC legislation. Here are some pros and cons to help you decide if an LLC is right for you.
- Protect your personal assets from lawsuits: If someone sues you when set up as an LLC, your personal assets are protected. Only the LLC’s assets are at risk.
- Pass-through taxation: Pass-through taxation is an IRS related ruling allowing LLC profits to be passed directly to the owner. Taxes are paid on by the individual, avoiding double taxation.
- Easier management responsibilities: LLCs are much more easily managed than corporation or partnerships and many states offer reduced fees.
- It costs money to set up an LLC: You can set up an LLC with the State Corporation Commission and pay a small fee. Many people choose to use an attorney or hire a services company. These options cost from a few hundred to a few thousand dollars.
- Keep your money separate: It is important that you never mingle your LLC money with your personal money. The slightest infraction could cause a litigant to claim the LLC is not a separate entity, causing you to lose any LLC protection.
- Mortgages can complicate: If you already have a rental dwelling with a mortgage on it, changing to an LLC could look like a sale to your mortgage company. If you have a due-on-sale clause in your mortgage it may cause the mortgage company to require payment in full.
The decision to form an LLC is complicated and each landlord’s situation is different. Consider the above information and consult with your CPA or attorney to see if an LLC benefits you. Then let the experts at Cobb-Hall provide insurance solutions designed specifically for your needs.