Should you form an LLC for your investment properties?
Weigh pros and cons of forming an LLC for your investments
- An LLC can protect your personal assets from liability.
- LLCs can also offer tax advantages.
- The cost to form an LLC can add up.
- Liability insurance is an alternative to forming an LLC.
Should you form a limited liability corporation, or LLC, to help shield you from liability for your investment properties should something go awry, such as a lawsuit?
There is no one-size-fits-all answer to that question, as each investor’s situation is unique. By evaluating the pros and cons of forming an LLC, however, you can get a better idea of whether such a move is right for you. Perhaps the surest way to come to an opinion, however, is to consult with an attorney who can wade through all the fine details of your situation and come to a solution tailor-made for you.
Pros of LLCs
One of the primary benefits of an LLC, and the benefit that makes this particular business structure so popular, is that it shields your personal assets from liability, such as if the business gets sued.
For example, if a tenant was injured in one of your investment properties, they may sue you as the property owner. If you owned the property individually, your personal assets could be at risk. If the property were owned by an LLC, however, only the assets owned by the LCC would be at risk.
Forming an LLC can also come with tax advantages. Owners of LLCs can take advantage of what’s called “pass-through taxation.” This allows you to avoid “double taxation” — i.e., getting taxed once as a corporation, and again when shareholders receive dividends. The IRS classifies sole owners of LLCs the same as a sole proprietorship, meaning income and capital gains from the LLC can be distributed to the owner, who then pays taxes as an individual while still taking advantage of the liability protections of the LLC.
Cons of LLCs
LLCs can be expensive to form. Usually there is an upfront fee to form the LLC, and some states charge annual taxes or fees as long as the LLC is in operation. There is a cheaper alternative in the form of liability insurance. While liability insurance comes with limits, and may not cover all of your liability if it exceeds the limit, in some circumstances it can be an effective, cheaper alternative to forming an LLC.
It’s also important to be careful not to co-mingle your personal funds with your business if you form an LLC, as doing so can negate the liability protections an LLC can offer. Some examples of co-mingling business and personal funds include transferring money between business and personal accounts without the proper documentation; writing business checks for personal matters; using the same bank account for both personal and business matters; and using money from the business to pay for your personal expenses without documenting it properly.
There are both pros and cons to forming an LLC to manage your investment properties. While the choice is ultimately up to you, it’s probably best to consult with an attorney before making a final decision. An attorney will help you figure out exactly what kind of corporate structure makes the most sense for you and your investments.