How To Form An LLC For Your Rental Property

Many landlords choose to incorporate their properties either as an LLC or a corporation. This allows them to better protect their own funds as liability shifts from the landlord to the corporation. The process of incorporating a rental property is relatively straightforward and offers landlords far more protection.

For more information about whether you should consider incorporating your rental check out our blog: Should you form an LLC for your Rentals?

3 things you need to know about incorporating a rental property

Select a Business Entity

The very first thing you need to do is understand which type of business entity you are going to incorporate as, as well as the particular benefits that come with each.

There are four main types of entities:

• C corporations;
• S corporations;
• LLCs (Limited Liability Company);
• and sole proprietorships.

You can rule out sole proprietorships as they don’t offer the liability protection the other entities offer.

Most landlords choose to incorporate property under an LLC rather than an S or C corporation. This is primarily because an LLC allows for flexibility in the management of their property and does not require the same formalities that corporations require. For example, LLCs are not required to hold annual meetings. At the same time, an LLC will still provide you with protection from liability.

Select an Incorporating State

The next step is important as different states have different costs associated with them when you incorporate them. For example, California has an $800 annual franchise fee.

If you live in the same state as your rental, then the decision is easy, you can only incorporate in the state in which you live. However, if your rental is in a different state you can choose to incorporate it in that state. This is a little trickier in general and it’s well worth consulting with professional legal advice.

Incorporating in the state where your property is located may require a higher filing fee, and your annual corporate report will also cost more to file. If you choose to incorporate in your home state, however, you can register to do business in the state where your property is located.

Transferring Property

If you plan on becoming a landlord soon and have yet to purchase your rental property, you might consider incorporating it before you make your first investment. Note that some banks don’t like giving mortgages to corporations as they prefer an individual to be liable.

However, if you already own rental property, you will be required to transfer the title of the property to your LLC or corporation to gain liability protection. Transferring the property may be a simple or complicated process depending on your mortgage.

1. To do this, create a Quit Claim Deed. The deed will list you as the “Grantor” and the LLC as the “Grantee.”
2. Go to the website of your County Clerk and search for instructions for how to file a deed. There is usually a small filing fee.

Some mortgages have a due on sale clause that will require you to pay off the mortgage when you transfer the title as they require an individual to be liable to pay the mortgage.

11 Steps to Forming an LLC for your Rental

Below we break the process down into 11 actionable steps you can take to help you create your LLC:

1. If you have an existing mortgage or loan for your property contact the lender/ bank and find out whether or not you will be allowed to transfer the title to you LLC and if they have any requirements (they may increase your interest rate, charge an assumption fee, etc.).
2. Choose a name for your LLC, it must be unique. (Landlords often go with the property address)
3. Fill out the Articles of Organization. These state the basic information about your LLC.
4. Create an LLC Operating Agreement, which sets out the rights and responsibilities of the LLC members (even if that’s only you).
5. In some states, you will be required to publish a notice of intent to form an LLC. This is a notice that’s published in a public newspaper and states your intention for incorporation on the state. This often comes with a publishing fee. Do some research to determine whether or not your state requires you to publish a notice of intent and what the fee is.
6. Some states will also require certain licenses and permits. These differ state by state, so research your specific state laws.
7. Next, you need to register your LLC with your state by turning in the formal documents. This may come with a filing fee.
8. If you already own the property you will need to transfer the title as stated above.
9. You may not have to obtain a tax ID number, but chances are that if you’re wanting to move the property into an LLC then you’re likely doing something that requires this to happen. If your LLC has more than one owner, if you have employees, or if you meet other requirements that vary by state then you’ll need to get a tax ID number when you create your LLC.
10. Set up a separate bank account for your LLC. You should have a different bank account for every LLC you own., this keeps all your finances separated. Without separate bank accounts, your finances may be liable which would defeat the entire point of forming the LLC.
11. Update your rental leases to state the LLC as the owner and rent payments should be deposited in your LLC’s bank account.

Create an LLC with Rocket Lawyer

• Form an LLC with the help of Rocket Lawyer.
• Create an LLC Operating Agreement to outline the rights and responsibilities of each member of the LLC.

What is the Cost of Creating an LLC?

Because the costs vary widely state by state it’s recommended you do specific state research on the costs of creating an LLC. Below we outline several of the more major potential costs for forming an LLC.

Process Potential Costs

• Registering for an LL:C $50 – $650
• Creating an Operating Agreement: $50 - $200
• Publishing a Notice of Intent: $40
• Annual Filing Fees: $50-$500

Ongoing Costs Associated with an LLC

Below are two possible ongoing costs once you create an LLC:

• Annual franchise tax can be anywhere between $250 – $800 (California).
• Most states charge an annual fee for having an LLC. The average annual fee is $127.

Another thing worth considering is the potential changes to the terms of your loan. As we stated above some lenders may either increase your loan or ask for full repayment as a result of transferring the title of your existing mortgage.

There are also potential tax consequences for transferring ownership as the property may have increased in value since the time you bought it.

These additional tax consequences can be avoided by creating an LLC before you buy the property.

Related: How to Pay No Taxes On Rental Income

A rundown of the Pros and Cons of incorporating your Rentals

Pros:

• LLCs limit your personal liability, which helps protect your finances.
• They separate and protect each of your rental properties.
• You get the benefit of pass-through taxation, so your income is not taxed more than once.

Cons:

• Additional paperwork can be tedious.
• There could be fees for transferring ownership,
• It’s potentially more difficult to qualify for a mortgage as an LLC and you’ll possibly have a higher interest rate.
• Forming an LLC can be expensive with annual costs that can quickly add up!

Despite the additional work and costs, the protection LLCs provide is often worth it for landlords.

No matter whether you’re just learning how to be a landlord or have many years of experience, incorporating will provide you with the liability protection you need to keep your own personal funds safe. When you do decide to incorporate property under a separate business entity, you’ll need the help of experienced legal and financial counsel to help you through the process.

Thanks for reading and we hope you found this blog interesting! However, do note that the purposes of this article are for general information. We are not licensed financial or legal professionals and as such nothing in this article should be understood to be financial or legal advice. If you need financial or legal assistance please seek the help of a competent professional.