Form a LLC when buying a property for rent? ? Legal Office

This is a question for your personal attorney.

An LLC is a legal entity created at the state level. It can be owned by an individual, a group of individuals, a corporation, a group of corporations, a partnership, a group of partnerships, or a mixture of any or all of the above. The principal benefits are flexibility of ownership and (sometimes) limited liability of the owners.

The liability protections typically afforded by an LLC or corporation are largely worthless in a small closely-held entity. The liability veil is very easily pierced. It would be one thing if you had 50 partners throwing in together to buy a large multi-million dollar apartment complex but not for a single investor with a small handful of properties. Even if it does shield your personal assets, the real estate holdings are likely to be your largest assets and those within the LLC are fully exposed to any and all claims against the LLC.

LLCs work nicely where multiple corporations or partnerships will own another partnership. They are also great for bank holding companies since banks cannot be owned by a traditional partnership. For an individual investor however the costs of maintaining the LLC far outweigh any benefits from it in the vast majority of cases. In most cases a good general liability insurance policy will cost you less and provide better protection AND it not only protects your personal assets but those held by the LLC as well.

At the federal level an LLC is a disregarded entity and is taxed as if it didn?t exist, meaning that you?d file your rental income and expenses on Form 1040, Schedule E, and be subject to all of the limitations there. At the state level some are disregarded entities but most must file state returns as a corporation or a specialized return as an LLC. Many states also have minimum franchise fees that LLCs must pay regardless of profit or loss. Forming an LLC in one state (usually for lower fees or looser reporting rules) but operating in another state may result in higher state income tax rates on a ?foreign? entity. You may also be required to make public financial disclosures that you would not need to make if you didn?t form an LLC.

So, this all rolls back to your personal attorney for his or her recommendation. Be sure that they explain all of the pros and cons fully before you take the plunge. Then consult with a local CPA or EA for the tax matters that you?ll need to deal with.

Source: http://attorney.solve-up.com/attorney/form-a-llc-when-buying-a-property-for-rent/

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