If you're a rental property owner in Charleston, you may be wondering if you should form a Limited Liability Company (LLC). Forming an LLC means that you're structuring your business to protect you (the owner) from potential debts and liabilities. That way, no matter if you own one or several investment properties, you have personal liability protection.
In this post, we're discussing the pros and cons of forming an LLC from the perspective of Charleston property management. However, it's important to note that this isn't legal advice, just an overview of how an LLC or other business entity can benefit you as a property investor!
The Positives of Forming an LLC
As a property owner, you must have legal protection—or you risk putting your private assets at risk. For example, if one of your renters files a lawsuit against your company, then that could cause several of your private assets to enter into the lawsuit.
There are several benefits for forming an LLC, including:
- Pass-through taxation: All of the profits and losses from your rental business pass through the company and to the owners and members who report them on their tax returns.
- Personal asset protection: Forming an LLC forms a shield that protects your private assets from litigation. Because the LLC creates a separate entity, that means it's much easier to manage and keep your assets protected.
- LLC structures offer additional flexibility: Forming an LLC, even if you only have one property, means you're creating more flexibility in your company's structure. An LLC allows you to decide who is involved in the daily decision-making—or to hire people who have this expertise.
As a Charleston property management professional, this is the type of business entity we see most small-scale investors forming when they are just getting into the rental business.
According to South Carolina's Uniform Limited Liability Company Act, all of the debts, liabilities, and obligations of an LLC are solely the company's debts, liabilities, and obligations. Therefore, no manager or member is liable for the debt, liability, or obligation.
While that's beneficial for you as an individual investor, that doesn't mean an LLC is drawback-free! Those drawbacks include the following:
- Initial set up fees: If you have an attorney set up your LLC, it could cost up to $2,000. Forming an LLC with the state of South Carolina costs $110 if you happen to have some legal experience under your belt.
- Protection limitations: If you fail to keep separate business books from your 'household records,' that means your LLC's business structure isn't completely protected. If this occurs, a judge can bring your private assets into litigation.
- Self-employment tax requirements: The taxes that pass through an LLC are subject to self-employment taxes for all members who work for your company—including you!
- The requirement for annual filing fees: As part of your administration responsibilities, you must file an annual renewal notice. That renewal fee is close to or the same as the initial incorporation fee.
Even with the above points in mind, forming an LLC is especially beneficial for investors who own multiple properties. Still, any property investor in Charleston can benefit from forming an LLC. Whether you invest in one property or several, an LLC offers pass-through taxation and asset protection.
When Should You Get Started?
Creating an LLC outlines the rights and responsibilities by which all 'members' of the company must follow. This operating agreement helps you manage your properties seamlessly while simultaneously protecting all members of the LLC should legal issues arise.
Before ever purchasing a rental property, you might be wondering if and when you should form an LLC. Even though you can form an LLC at any time, it's best to do so before purchasing an investment property or renting out a spare home. That way, you can avoid potential issues, including the following worth noting:
- Your mortgage company must receive notification regarding the transference of the title to an LLC.
- It's your mortgage company's right to close the mortgage and issue a new loan, which could result in closing costs and a higher interest rate.
- You must update your rental leases and notify your renters about the LLC.
- Forming an LLC after purchasing property could trigger additional taxes, including the Title Transfer Tax.
When you form an LLC before investing in property, then you can purchase it under the LLC's ownership. That means the property's deed is going to be in the LLC's name. However, if you form the LLC after purchasing an investment property, then you must transfer the property's deed to your newly formed LLC.
Still, despite these issues, we know from our experience as a Charleston property management provider that some form of business entity protects you as the investor—and that's protection worth consideration!
This Is Just the First Step to Protecting Your Investment!
Investing in property comes with several risks and rewards. Knowing how to manage your company from top to bottom—including whether or not you should form an LLC—involves a significant amount of research and resources.
Considering whether to form an LLC is just one element of protecting your investment property!