Start an LLC for Rental Property (Free Guide)

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by How to Start an LLC Team
Last updated: June 22nd, 2024

Rental properties are popular as they offer passive income as well as long-term appreciation. To protect these investments, it is important to understand the benefits of forming a Limited Liability Company (LLC).

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How to form an LLC for a rental property

Select a business name

Pick a name that is easily recognizable to potential tenants. Verify the availability of the name by checking with your state’s Secretary of State website or business registry. LLCs are allowed to choose their own names, whereas sole proprietors must use the owner’s name.

Use terms like “property management” or “rentals” in your LLC name to communicate what the business does.

Appoint a registered agent

A registered agent receives legal documents on behalf of an LLC and is the point of contact with the state. An owner can serve as their own registered agent if they have a physical address in the state where the LLC is formed. However, many business owners prefer professional registered agent services, as they provide privacy and convenience.

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File formation documents

To formally establish your LLC, file Articles of Organization with the state. These documents ask for your LLC name, registered agent information, and a description of your business. Be sure to specify that your LLC will be engaged in rental property management and ownership activities.

Draft an operating agreement

You may think this step is unnecessary, especially if there is only one member of your LLC. However, it may protect you if disputes arise. An operating agreement should address these key points:

  • Ownership of content (especially as collaborations between creators become more common)
  • Revenue distribution
  • Dispute resolution and subscriber issues

Obtain an Employer Identification Number (EIN)

An EIN is essentially a Social Security number for your LLC. It will be used for tax purposes and opening a business bank account. You can obtain an EIN for free from the IRS website. Having an EIN is important for rental property owners, as it keeps personal Social Security numbers private when interacting with tenants.

Open a business bank account

Maintaining a clear separation between your personal and rental property business finances is important. Open a business bank account using your LLC name and EIN. Having a separate bank account makes tracking income and expenses easy.

Pay rental property LLC taxes

Any income generated from rental property is considered passive income and taxed at normal income tax rates. However, the owner of the LLC can claim deductions of business expenses to reduce the overall tax burden.

These deductibles include:

  • Mortgage interest
  • Property taxes
  • Repairs
  • Maintenance
  • Insurance

Imagine a beachfront apartment that earns $20,000 each year. But each year, there are $12,000 in deductible expenses, such as repairing the kitchen and bathroom. Taxes will only be paid on the $8,000 left.

Why form an LLC for rental property

An LLC is a business structure that offers personal asset protection while remaining simple. LLCs are attractive for small businesses because they are easy to set up and manage. There are many benefits for rental property businesses that form LLCs.

Personal asset protection

One of the main benefits of an LLC is the personal liability protection it provides. If the LLC faces legal problems, the owner’s personal assets (such as their homes or cars) are protected and can not be used to pay off business debt.

For example, imagine Sarah, who owns a single rental property as a sole proprietor. If a tenant is injured on her property and decides to sue, Sarah’s assets would be at risk. However, if Sarah had established an LLC, her assets would be protected and only the LLC’s assets would be vulnerable.

Series LLCs

A Series LLC is a type of structure that allows multiple “series” under one LLC. Each series functions as its own entity.

“Sarah’s Rental Properties” owns three different properties. With a Series LLC, you could create “Series A,” “Series B,” and “Series C,” each holding one of the properties. If a tenant in the property owned by Series A sues the LLC, only the assets held by Series A would be at risk. The assets of Series B and C would be protected.

Flexible taxation

Rental property LLCs can choose how they are taxed. This can lead to potential tax savings. By default, a single-member LLC is taxed as a sole proprietorship, meaning that the profits and losses are included on the owner’s personal tax return. This pass-through taxation eliminates the double taxation faced by corporations, where the business is taxed on its profits, and then owners are taxed on the dividends they receive.

Sarah has established an LLC for her rental property business. As a single-member LLC, the profits are passed through to Sarah’s personal tax return, simplifying her tax return process.


Establishing an LLC allows rental property owners to create a separate business entity. Having a dedicated business bank account can enhance a business’s image.

As a sole proprietor, Sarah used to use her personal bank account for rental property transactions. This made it challenging to keep business and personal finances seperate. When she forms an LLC and opens a business bank account, Sarah can now easily track her rental income and expenses.

Drawbacks of an LLC

  • Costs: Forming and maintaining an LLC involves a few fees. These fees can include state filing fees, annual reporting and compliance fees as well as potential legal costs for drawing up paperwork. For those who have a significant rental property portfolio, these costs may be justifiable. For those who have one or two properties, these costs may not outweigh the benefits of forming.
  • Transferring properties: Transferring ownership of properties to an LLC may bring a transfer fee, and some states require LLCs to pay a franchise tax based on the company’s worth. These additional expenses and admin load must be considered when deciding whether to form an LLC.
  • Administrative burden: Running a rental property LLC requires more stringent record-keeping than a less formal business. These include keeping accurate financial records, tracking expenses for tax deductibles, and ensuring compliance with state and local regulations.


Do I need an operating agreement? 

While not legally required in most states, an LLC operating agreement is highly recommended for rental property LLCs. It outlines the rules, responsibilities, and ownership structure of an LLC.

What is the difference between a single-member LLC and a multi-member LLC?

A single-member LLC has only one owner, while a multi-member LLC has two or more owners. Multi-member LLCs may need operating agreements to define each member’s roles, responsibilities, and profit-sharing arrangements.

If I want to stay as a sole proprietorship can I buy liability insurance? 

Yes, you can purchase liability insurance as a sole proprietor to help protect your business from potential lawsuits. The liability insurance policy does not provide the same level of personal asset protection as an LLC.

What annual fees are associated with an LLC?

Annual fees for LLCs vary by state but typically include a filing fee for your annual report or franchise tax. These fees can range from around $50 to several hundred dollars, depending on the state.

If I have property across the whole country, where should I form my LLC?

Consider forming your LLC in a state with favorable tax laws and low annual fees, such as Wyoming, Nevada, or Delaware. You’ll then need to register your LLC as a foreign LLC in each state where you own rental property to ensure compliance with local regulations.

Can I form an LLC if I’m not a U.S. citizen?

Non-U.S. citizens can form an LLC for their rental property business but will need to obtain an Individual Taxpayer Identification Number (ITIN) and follow specific regulations.

How does forming an LLC affect my personal tax return? 

As a single-member LLC, your rental property income and expenses will be reported on Schedule E of your personal income tax return. If your LLC has multiple members, you’ll need to file Form 1065 and provide each member with a Schedule K-1.

Can I form an LLC in a state different from where my rental property is located?

Yes, you can form an LLC in a different state, but you may need to register your LLC as a foreign entity in the state where your property is located.

How do I pay myself from my rental property LLC?

You can pay yourself by taking an owner’s draw or by a regular salary. Consult with a tax professional to determine the most tax-efficient method for your specific situation.

Can I use my bank account for my rental property LLC?

While you can use your personal bank account, it’s recommended to open a business account for your business. This helps maintain the legal separation between your personal and business finances and makes bookkeeping and tax preparation simpler.

Are the costs of setting up an LLC tax deductible? 

According to the IRS, start-up costs are deductible. These include:

– State filing fees
– Legal fees for drafting articles of organization and operating agreements
– Accounting fees
– Costs of obtaining business licenses and permits

How does an LLC affect my ability to get financing for rental properties?

It may be easier to get financing for rental properties, and lenders may view LLCs as less risky than individuals.

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