Owning properties is a popular path to building long-term wealth. As a solo business owner, owning a rental property can help you build recurring rental income and build wealth through property appreciation. But the business and legal setup becomes more complicated as you add multiple properties to your growing real estate empire.
Many landlords, whether that be for short-term or long-term rentals, use an LLC, or an LLC taxed as an S Corp, when managing and growing their landlord business. S Corp taxation can lead to valuable tax benefits. Here’s a closer look at the pros and cons of adding a rental property to your existing LLC and another option to protect your personal and business assets as your business grows.
LLCs for rental property owners 101
If you’re new to LLCs, LLC is short for a limited liability company. LLCs are business entities that can separate your business finances from your personal finances, and they offer valuable legal and financial asset protection when used properly.
LLCs are also a simpler way to handle taxes than other business structures, as the taxes pass through to your personal income tax returns, so you don’t have to worry about paying income taxes more than once. This is known as pass-through taxation. While it’s a bit more complicated than operating as a sole proprietorship, where your entire business runs under your name, the legal and financial benefits often outweigh the extra effort.
Why rental property owners need an LLC
A lot can go wrong when you own a rental property. While you hopefully have wonderful tenants who always pay on time, don’t damage your property, and don’t get hurt at your property, disputes can arise and injuries can happen. You might even get into a legal or financial dispute with a lender. These are all common when handling property management for property owners.
In a bad scenario, you could wind up on the wrong side of a lawsuit, where your tenant or one of their guests sues you for any number of reasons. If you don’t have a business entity like an LLC, they’re suing you personally and can go after other assets you own, including your bank account, investments, and your home.
An LLC can provide a strong barrier to protect your personal assets from legal liabilities that arise in your business. But in many cases, a single LLC isn’t the best choice. Here’s a closer look at your options.
Options for handling multiple properties
If you own a single LLC that houses multiple properties, something going wrong at any property can have serious consequences across your portfolio. A lawsuit could go after anything your LLC owns, including financial assets, the property in question, and other properties you own. That’s why it’s not advisable to hold rental properties in an unrelated business LLC.
If you run a separate business, such as freelancing or consulting, you should keep your business separate from your investment properties. Mixing your businesses can cause you to lose some legal protections and make your accounting and bookkeeping much more difficult. Having articles of organization for each entity helps prove the businesses are separate.
Here are the important pros and cons of adding a rental property to your existing LLC when running a solo landlord business:
Pros of keeping multiple properties in a single LLC
- Fewer tax forms: A major benefit of using a single LLC for your landlord business comes around at tax time when you can file taxes using a single Schedule C tax form, which is appended to your personal tax return. When running an LLC taxed as an S Corp, your taxes flow through to your personal return with Schedule K-1.
- Fewer financial accounts: Every business entity is an independent business and should have its own checking account and other financial accounts as needed, such as savings accounts, credit cards, and potentially additional accounts used to hold security deposits and other segregated assets.
- Protects your personal assets: When you separate your personal and business finances and maintain your LLC well, it protects your personal assets.
Cons of Keeping Multiple Properties in a Single LLC
- Liabilities shared across the LLC: Legal liability risk is the biggest reason to avoid keeping multiple properties in a single LLC. If a lawsuit happens with one property, it can take down your entire business.
- Property finances can be harder to track: When jumbling rents and business expenses in a single entity, it’s harder to know which buildings are profitable and which may be merely breaking even or losing money.
- More difficult to sell properties: Selling an unprofitable property is more complex when you have to figure out separate finances if bundled with others in a single LLC.
Note: Collective doesn’t support businesses where the owner holds investment properties in the same business entity as their other solo business. If you own investment property and another business, it may be best to have an LLC for your property business and another LLC for your other business.
Be careful of which business entity you choose. With a C Corp, for example, you could be subject to double taxation. In that case, your business would have to pay taxes for business profits and you would pay taxes for the income you personally receive from the business.
Best way to handle multiple properties as a solo landlord
Rather than keep each property in your primary LLC, it’s best for each property to stand independently with its own LLC. You should consider owning two or more LLCs if you own two properties. It’s not as complicated as it sounds. Remember to create a unique LLC operating agreement. Depending on where you live, the filing fee to create a new LLC may be quite low, but some states, like California, make this an expensive process.
Your main real estate investing LLC is an ongoing business you own and as an entity separate and distinct from the owner, an LLC can own other LLCs. Each rental property LLC holds the property title to its respective property.
When each property has its own separate LLC, your business entity can control those LLCs while not directly owning any properties through a holding company. This common strategy is used by large corporations and wealthy investors, but you don’t need to be a billionaire to do it yourself.
When set up this way, if there’s a lawsuit at one property, your other LLC assets and any other properties held outside of that LLC can’t cross into other entities. For example, if you own three properties with three LLCs and there’s a lawsuit at property A, property B and C are safe from the ramifications of that legal dispute.
Setting up multiple LLCs
To start, you’ll need to pick a business name for each property. When picking your LLC’s name, you may want to use the address followed by LLC, such as 123 Main St LLC. Any business name that’s not already taken in your state may be acceptable, but be thoughtful about how you choose the name of each entity. You can search on your Secretary of State website to find if a business name is already registered.
Each entity should also have its own Employer Identification Number (EIN) for banking and tax purposes. To maintain the corporate veil, a term for the business liability protection provided by a business entity, each should also have a separate bank account and insurance policy. Even when using multiple entities, appropriate liability insurance is critical.
Because LLCs are passthrough entities, eventually, all income and expenses end up on your personal tax return for the IRS, but with the added legal protections. This structure can be extremely valuable should an unexpected legal action arise in the future.
How Collective can help
Collective supports solo business owners with their monthly bookkeeping, accounting and annual business taxes, among other services. While Collective doesn’t support members who own rental properties under their service-business LLC, we can reduce the back-office burden of your operating LLC.
If you want to learn more about working with Collective, check out more about how it works and get started here.
For real estate investors with complex small businesses, it could be best to hire a real estate tax professional, similar to how you can work with Collective for your other business.
For real estate investors, landlording is a great decision for many individuals and families, but it’s important to take the time to understand your best options for protecting yourself from personal liability for unexpected events and build a real estate investing business that rests on a solid foundation to provide the best benefits for years to come.
While putting properties in your main LLC isn’t usually the right decision, keeping each property in its own LLC can keep them in a silo that protects the rest of your business and personal finances so you can rest easy that your assets are working in the best way for your long-term goals.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or financial advice. You should consult your own legal and financial advisors to determine the the legal setup of your business.
Eric Rosenberg is a finance, travel, and technology writer in Ventura, California. He is a former bank manager and corporate finance and accounting professional who left his day job in 2016 to take his online side hustle full-time. You can connect with him at Personal Profitability or EricRosenberg.com.