(While this article is meant to give you general information, every case is different. This article shouldn't be construed as legal advice. For legal advice that's specific to your situation, speak with a qualified business attorney in your area).
Are you considering buying an investment property? Have you considered setting up an LLC (limited liability company)? Many people end up setting up an LLC under which their investment property operates. This way, the individual setting up the LLC protects their own personal assets from claims.
An LLC can be a great way to manage a business. It's a business structure that creates a separate legal entity from yourself. However, an LLC isn't the right choice for every investment property.
Denver lawyer Kyle Bachus of Bachus & Schanker offers some advice about when you should set up an LLC for your investment properties.
“Very often, setting up an LLC for your investment properties is the right way to go," said Bachus. “There are benefits to having an LLC for an investment property such as protections from legal liability, a clear operating agreement and straight-forward delineation of business expenses. However, an LLC may not be appropriate for a short-term investment property. Whether you should set up an LLC for your investment property depends on the size and scope of your investments."
Listed below are a few of the reasons you should consider setting up an LLC:
An LLC Offers Limited Legal Liability
Kyle Bachus (KB): Perhaps the most attractive benefit of creating an LLC is the limited legal liability. In most cases, with an LLC, your personal assets are not at risk if there is a lawsuit brought against you by a tenant. That goes for homeowners that rent through short-term rental websites as well as other types of investment properties. For example, someone falls at your investment property, and they bring a lawsuit. You don't have to worry that your personal assets such as your home or vehicle could be seized to pay for a settlement. With an LLC for your investment property, you can rest assured that your interests are protected.
In fact, you may want to create multiple LLCs if you have multiple properties. This way, each property is its own asset, and is protected from liability. One or more LLCs can shield you from legal liability and keep your personal assets safe when you have investment properties.
The Ability to Bring on Other Investors With a Clear Operating Agreement
KB: With an LLC in place, you're already organized to add additional investors to the business. The State of Colorado doesn't require you to file an operating agreement to go with your articles of incorporation. However, the bank will want to see an operating agreement and if you bring in other investors, it's critical to have that document in place.
Anonymity Comes With a LLC
KB: An LLC gives you a certain amount of anonymity. If there is a complaint or an issue that becomes public, it's the LLC that owns the investment property and not you personally. An LLC gives you a certain peace of mind that you can run your investment property without your name being directly tied to ownership.
LLC and Business Expenses
KB: With any investment rental, there are associated expenses. As a business owner, you're entitled to deduct these expenses. It's much easier to keep track of these expenses if you have your own LLC. Having the LLC allows you to get a bank account for the business. With the bank account, you can keep track of income and expenses. If there are ever questions about costs, you have an itemized list right at your fingertips.
Pass-Through Taxation Benefits
KB: An LLC gives you pass-through taxation. In other words, you don't have to pay corporate income tax. Your LLC gets taxed as though it's your own income. Even though you get the legal protections of a separate business structure, you still pay the same taxes that you would pay on your personal income.
The Ability for Your Business to Grow
KB: It's easier to start managing investment properties as an LLC than it is to convert properties to an LLC later. In other words, the sooner you get your investments organized into an LLC, the better. With an LLC, you can celebrate growth because you already have a sound and workable business structure for your investment properties.
Listed below are a few of the situations when you should probably NOT set up an LLC:
When Your Investment Property Is Very Short-Lived
KB: One of the rare circumstances where it's not beneficial to have an LLC for your investment property is when the endeavor is over a short period of time. For example, if you go on vacation and you put your property on a home rental website for two weeks, it probably doesn't make sense to go through the entire LLC process for two weeks. While an LLC is generally helpful, for very short-term renting, an LLC may not make sense.
If You Plan to Live in One Unit of a Multi-Unit Property
KB: Some investment properties are multi-dwelling units. Sometimes, the property owner lives in one unit and rents out the other. In that case, it's not going to work to have an LLC. Most banks can't extend a loan in situations where the owner lives on the property but places the property in an LLC. Be sure to check with a local attorney to see what laws apply in your area.
The Property Isn't Located in State
KB: Keep in mind that you have to set up your LLC in the location where the property is located. You can't set up a Colorado LLC for a property in Florida, for example. While you may need to set up an LLC in another state, you should not set up a Colorado LLC for an out-of-state property.
What About LLC Fees? Shouldn't One of the Reasons to Avoid an LLC be Avoiding Fees?
KB: No, you shouldn't let fees stand in the way of creating an LLC. The cost to start an LLC in Colorado is only $50. Annual filing fees are only $10 per year. The benefits of creating an LLC outweigh the nominal costs.
Creating an LLC for Your Investment Properties
KB: Creating an LLC is usually a sound management plan for your investment properties. An LLC allows you to protect your assets and investments. It helps you prevent litigation by creating a clear operating agreement and allowing room for your business to grow. While there are limited circumstances where it's not necessary to make an LLC, usually an LLC is a great way to protect your interests and make your investment properties thrive.
Posted by Pat O'Connor
Pat O’Connor has dual citizenship in both Wisconsin and Colorado, having been born and raised in Wisconsin Dells, but later adopted by the Centennial State. A graduate of the University of Colorado (B.S. Journalism, 1980), O’Connor began her career as a sportswriter at the Boulder Daily Camera under the tutelage of the venerable Dan Creedon. Her experience also includes stints in public relations at Aspen Highlands Ski Area, the Colorado Trial Lawyers and the Colorado Division of Wildlife. When she isn’t piecing together sentences, the self-proclaimed “Cheesehead” enjoys traveling, running, playing golf, hiking 14ers, horseback riding and skiing. During football season, she can be found cheering for the Buffs and "whooping it up" when the Packers win. She loves talking sports and giving recommendations on cheese curds.Facebook LinkedIn Twitter