Traditional LLCs and series LLCs have advantages for rentals, but the right LLC depends on your risk tolerance. Also, an S Corp election provides the same protections as an LLC, but it may not be advantageous for a rental.
Rentals under an llc
Traditional llc
A traditional LLC is a business entity that provides limited liability for the business’s debts and liabilities – lenders cannot seize personal assets to fulfill the company’s debt in case of a lawsuit. Also, the profits of LLCs pass through to the owners, avoiding double taxation.
Specifically, for those with multiple investments, you may deem it risky to have just one business entity protecting your assets. If you have a low-risk tolerance, the option to form multiple LLCs described below may be right for you.
Series LLC
A series LLC acts like a traditional LLC in providing limited liability and avoiding double taxation, except it is a collection of separate LLCs that operate under a parent LLC.
A series LLC may be right for you if you have a low-risk tolerance. Having separate LLCs provides independent protection for each of your investments in case of a lawsuit. For example, suppose you have rental properties, and a tenant from one of your properties sues you. In that case, only one rental property is at risk. Thus, you have extra protection when your investments are under separate business entities.
IMPORTANT: Not all states allow series LLC formations. Check with your state to see if it allows this kind of business entity.
Rentals under an S Corporation
Like LLCs, S Corporations offer limited liability and avoid double taxation. However, in most cases, S Corps are not advantageous for rentals. The primary benefit of S Corps is that they help avoid self-employment taxes, but rental income is not subject to self-employment tax, so you would not be able to enjoy the main advantage of S Corps. An LLC with no S-Corp status is likely the better choice for your rental.
Learn more about S-Corporation’s pros and cons.
