When just starting out as a real estate investor or as you grow your portfolio, you're likely to run into a commonly asked question amongst new landlords: should I establish an LLC for my rental or just keep it in my personal name?
Like any business decision, there are pros and cons to running your rental property under an LLC. We're here to shed some light on the advantages of operating as a rental property LLC.
How a Limited Liability Company (LLC) Works for Rental Properties
An LLC is a business structure that can provide protection from personal liability and pass-through taxation for landlords. An LLC can be used to own and manage multiple rental properties, providing a layer of protection for personal assets.
It is not required in the state of Virginia to have an LLC in order to operate a rental property. However, you might be required to possess a business license depending on the specific requirements in your city or county.
You can read more about licensing requirements for landlords in Virginia here.
Benefits of LLCs for Your Rental Property
A few of the most common benefits of operating under an LLC include:
Liability Protection: an LLC can provide asset protection, shielding the owner's personal assets from business-related liabilities. This means that losses that your rental business can incur are limited to the amount invested in the business, and you as the owner are not typically personally liable for the LLC's debts and obligations.
Tax Benefits: LLCs provide pass-through taxation, allowing rental income to be taxed only once. This means that the income generated by the LLC will be passed through to the owner to pay taxes on after expenses and debts are paid. However, tax advantages and disadvantages for LLCs can be very complicated and we advise seeking out professional advice from a qualified accountant or financial advisor.
Separation of Personal and Business Expenses: Rental property owners can keep their personal and business finances separate through a business bank account set up under the LLC.
Increased Credibility: an LLC can make an investment property appear more credible to tenants and lenders.
Flexibility: an LLC can be used to own and manage multiple properties, making it easier to expand your portfolio.
Potential Drawbacks for Virginia Landlords
Many of the challenges you'll run into with running your rental through an LLC boils down to cost and complexity. This includes:
Costs of Establishing the LLC: You'll have to pay multiple fees to set up the LLC as well as to maintain it.
Administrative Duties: The LLC will tack on additional paperwork to your business as well as further legal compliance to stay in line with.
Tax Implications: As we mentioned, taxes can get complicated with the extra layers of an LLC added in. While you can draw benefits from this, you can also end up paying more without the right professionals on your side to make the most of deductions.
Running your rental through an LLC can be an excellent business decision for those looking to establish longevity in the rental market. However, it's not always the right choice for everyone, and you must weigh your goals carefully.
What is the right choice for every Virginia landlord, however, is partnering with a qualified and experienced property management team that can help draw out the best from your investment.
For this, you'll want Northern Virginia's best in property management, Chambers Theory. We approach every property we manage with an investor's mindset, so you can always rest assured that your investment is growing daily.
To get started, head to our services page to get your free rental analysis today!
Additional Resources:
DIY Disasters: The Hidden Costs of Self-Managed Properties
Why Departmentalized Property Management Is The Right Approach
