It’s the age-old question that every Rentpreneur© contemplates at some point; ‘should I put my rental property into an LLC.’ With so many “gurus” on social media with an opinion that they present as fact, it’s hard to make a decision. Here is an unbiased discussion of the pros and cons of putting your rental property into an LLC.

Owning rental properties can be an incredibly lucrative business, but it also comes with inherent risks. Landlords seeking to protect themselves and their personal assets may be considering setting up a Limited Liability Company (LLC) to own their rental properties. But is this the right move?

What is a Rental Property LLC?
A rental property LLC is a legal entity that protects ones personal assets from being seized in the event of a lawsuit related to their rental property. This means (in theory) that, if someone sues them and wins, they cannot take any of the owners personal assets—the only thing they can take are those assets owned by the LLC itself. This makes setting up an LLC an attractive option for landlords who want to protect their assets from potential lawsuits.

Pros and Cons of an LLC
Setting up an LLC has many advantages, such as providing additional protection against potential lawsuits and allowing landlords to manage multiple properties under one umbrella company. However, there are some downsides to consider as well. For example, setting up an LLC requires filing more paperwork than owning a property outright; in addition, there may be fees associated with setting up and running the LLC each year. Furthermore, while creating an LLC helps protect landlords from certain liabilities associated with their rental properties, it does not completely absolve them of all responsibility—for example, if a landlord is found guilty of negligence in court, even if a property is held by an LLC, the owner may still be held liable for damages caused by that negligence.

Putting a rental property in an LLC (Limited Liability Company) in Washington state can have several advantages and disadvantages. It’s essential to consider these carefully before making a decision. Additionally, there are alternative methods to protect personal assets from lawsuits that may work better depending on your goals. Let’s explore the pros and cons of using an LLC and some alternative asset protection strategies:

Pros of Putting a Rental Property in an LLC:

1. Limited Liability: The primary advantage of an LLC is that it offers limited liability protection. If the LLC faces lawsuits or debts related to the rental property, personal assets generally remain protected. Landlord liability is usually limited to the assets owned by the LLC.
2. Separation of Personal and Business Assets: Operating the rental property within an LLC helps keep personal assets separate from business assets, which can simplify accounting and asset management.
3. Pass-Through Taxation: In most cases, LLCs have pass-through taxation, meaning the income or losses from the rental property pass through to the owners’ personal tax returns. This avoids double taxation.
4. Flexibility in Management: LLCs typically offer more flexibility in management and organization compared to other business entities like corporations.

Cons of Putting a Rental Property in an LLC:

1. Formation and Maintenance Costs: Forming and maintaining an LLC involves fees and administrative tasks. There may be initial filing fees and ongoing state fees to keep the LLC in good standing.
2. Personal Guarantees: In some cases, banks or lenders may require personal guarantees from the LLC owners, which could partially negate the limited liability protection.
3. Limited Liability Limitations: While an LLC provides liability protection, it may not cover all situations. For instance, if a landlord is found to have personally caused harm or are negligent, he or she might still be personally liable.
4. Financing Challenges: Some lenders may have stricter requirements or higher interest rates for LLC-owned properties, potentially making it more challenging to secure financing than getting financing as an individual.

Alternative Asset Protection Strategies:

Here are some options that might provide an alternative to an LLC and may even better protect a landlord. Many of these solutions require consulting a good financial advisor and/ or attorney to fully understand the options.

1. Liability Insurance: Maintaining comprehensive liability insurance coverage for your rental property can be a prudent alternative to an LLC. Adequate insurance coverage can help protect your personal assets in the event of lawsuits or accidents related to the property.
2. Umbrella Insurance: Obtaining a robust umbrella insurance policy that provides additional liability coverage beyond the standard homeowner’s or rental property insurance. This can help protect personal assets in case of large lawsuits.
3. Equity Stripping: Minimize equity in the rental property by mortgaging it to its full value or even slightly more. This can make the property less attractive to potential litigants, as there’s limited equity to pursue.
4. Tenancy by the Entirety (TBE): In Washington state, if you co-own the property with your spouse, it may be possible to hold it as Tenancy by the Entirety. This form of ownership can provide some protection from creditors.
5. Trusts: Holding property in a trust can offer some asset protection benefits.
6. Family Limited Partnerships (FLPs) or Limited Liability Partnerships (LLPs): These structures can provide some asset protection benefits, but they can be more complex to set up and maintain than an LLC.
7. Separate Entities for Each Property: Consider placing each rental property in its own separate LLC. This way, the liabilities of one property won’t affect the others. This particular solution may be prohibitive for landlords who own a small number of properties because it can significantly reduce profits and can because it can become administratively burdensome.
8. A slight variation to separate entities is Series LLC: In some states, including Washington, you can consider using a Series LLC, which allows you to create individual series (sub-LLCs) under one master LLC. Each series can hold a separate property, providing some segregation of liability.

Remember, asset protection strategies can be complex and depend on individual circumstances. Setting up an LLC has many benefits when done correctly; however, it’s important to understand exactly what sort of liability protection it provides before making any decisions about how best to structure your investments. Regardless of the legal structure, landlords should ensure that they are in full compliance with local, state, and federal regulations. Failure to be in full compliance can nullify all of the work done in the name of asset protection and waste a lot of money. As always engaging in thorough tenant screening and property maintenance can help reduce the risk of potential lawsuits. Consult with an experienced attorney who specializes in landlord-tenant law and its intersection with business law is crucial to determine the best approach for any specific situation.