Sean Martin | Director of External Affairs
If you’re a landlord, you’re a business owner. Incorporating your rental property under an LLC is the formal creation/recognition of that fact, and can serve to offer valuable protections to you. However, there can be some drawbacks, too.
What are the pros and cons? Let’s explore them.
Advantages of Incorporation
When you’ve incorporated your property you’ll officially have a new business that owns and operates your property. The two main advantages of this are limited liability protection, and tax advantages.
Limited liability protection means that if an accident happens on your property, your personal assets are protected and you won’t be held personally liable. Instead, the burden falls upon your business. This can save you from getting in to serious debt or, worse, bankruptcy.
Tax advantages can also offer great flexibility for landlords. As a business, you now have the ability to write off expenses, such as replacing an appliance or repairing flooring. Also, by collecting rent through your LLC business, instead of directly collecting rent as income, and then paying yourself a salary out it, you have more control over placing yourself in a preferred tax bracket.
Ownership structure can also make forming an LLC a no-brainer. If you have several business partners, forming an LLC will provide clarity on the ownership percentages and roles of each owner.
After seeing the important benefits an LLC can offer it may be difficult to imagine any downside, but there are several issues to consider.
Forming an LLC creates cost. You’ll have to pay a fee to set up an LLC – often times in excess of $1,000 – as well as additional fees to file a return each year. A trip to your CPA is also likely to be in order when it comes time to file taxes. That’s the flip side to those tax benefits mentioned above. They’re complicated, and can require an expert’s assistance to navigate.
Those complications can also mean greater hassle finding insurance and mortgages to complete financing on a property. Many lenders will not lend to an LLC, and even if they do the financing will be under your name. Also, while LLC’s offer greater protection to your personal assets, nothing is fool-proof and there may be complicated situations where the LLC may not offer full protection.
Your best bet, prior to making any final decision, is to consult with a number of professionals – your attorney, CPA, etc – to get a greater handle on how an LLC can be of benefit, and what the costs of those benefits will be.