It’s often the case that a property owner will fall into landlordship. Maybe you have a property that you had to leave when the job sent you out of town. Maybe that starter home just wasn’t big enough anymore and you decided to rent it out instead of selling it.
At Jason Cohen Pittsburgh, acquiring, owning, and managing rental properties is our business. We didn’t just start out by renting out a house as a way to steadily pocket some extra cash by making money by something that was already there. We treated it as a business from day one. So, we operate as a limited liability corporation.
In legal terms, there are four ways of operating a business, two of which — sole proprietorship and partnership — name you as your business. This means that you are personally accountable for them. Your home and assets are all linked to the business. In a corporation or limited liability corporation, your business is a separate entity, so your personal finances are not connected.
An LLC is almost a lighter version of a corporation. It borrows elements from corporation and proprietorship, enabling business owners to choose how they want to be taxed. This business structure also allows you to operate without the formalities of a board of directors and shareholders that corporations require.
The minimal paperwork and meetings of the LLC makes it ideal for property managers and landlords. If you own a few properties and want to make sure that they are considered separate from your personal residence to guard yourself against a professional catastrophe, one LLC should suffice. If you’re a professional property manager, conversely, and you are constantly acquiring new properties, you may want to consider forming several LLCs for various properties.
The reason to form multiple limited liability corporations is the same as the reason for forming one in the first place — to protect your other assets. Say you own 45 properties in your city. Property management is your business. Something goes wrong in one of the properties and it ends in a lawsuit. Having this property set up as its own LLC isolates it from the others. That way, you don’t have to worry about one incident in one rental property destroying your entire business.
A prohibitive factor for many property managers when pursuing an LLC is the cost. It varies by state, but in some it can be $800/year. However, you’ll just have to weigh this predictable, set cost against the risk and unexpected costs if you don’t limit your liability legally. Another drawback is that often banks may not lend money to LLCs, which makes financing more difficult than operating as another type of business entity.
When operating several LLCs for rental properties, run them as if they are separate businesses by setting up separate bank accounts and filing separate tax returns for each.
At Jason Cohen Pittsburgh, our combined decades of experience in property management have enabled us to learn how to best protect both our collective and personal assets. Aspiring and new property managers should consult legal counsel and solicit advice as to how to best handle the legal issues in forming their rental companies.