LLC for Rental Property in Illinois
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Introduction to LLCs for Rental Property
In 2024, a landlord walked into my office owning 14 properties in the southwest suburbs of Cook County. He wanted one LLC to hold all of them, so we built a series LLC with 14 series. His insurer refused to underwrite it. We rebuilt the structure as two sister LLCs, each holding about $2,000,000 in property. Each LLC took a matching $2,000,000 umbrella policy. The nonperforming properties went into one LLC and the performing properties into the other. One way to mitigate those risks is to form a limited liability company (LLC) for your rental properties. Form the LLC before you close, not after. That is the only way title insurance and your mortgage stay clean.
Understanding a Rental Property LLC
An LLC protects your personal assets and keeps your management and tax options flexible. Compared with owning in your own name, I find the tax filing simpler and the personal exposure lower. It does cost more to set up. The records also take more discipline than owning the building in your own name.
Benefits of an LLC vs a Corporation
The main reason I put rental property in an LLC is to protect your personal assets. If the LLC is sued, your personal assets are generally shielded. An LLC also passes its income through to your personal return, which can lower the tax on rental income. Lenders and tenants read an LLC as a sign that you run a real rental business. If you are deciding between entity types, I compare an LLC versus an S-corp for rental property in a separate guide.
Limited liability protection
As an owner (a “member”), you are generally not personally responsible for the LLC’s debts. That includes legal claims and damages that come out of running the rental.
Pass-through taxation for your Rental Income
An LLC is generally treated as a pass-through entity for tax purposes, which means that the LLC itself is not taxed on its income. Instead, the income is “passed through” to the individual members, who report it on their personal tax returns. This can be beneficial because it can help avoid double taxation that can occur with a corporation. The average person will save 3-3.5% annually.
Flexibility
LLCs offer more flexibility in terms of management and ownership structure than corporations. For example, an LLC for rental properties can be managed by its members, or the members can appoint a property manager to run the day-to-day operations. Additionally, an LLC can have a flexible ownership structure, with members having different percentages of ownership and different rights and responsibilities.
Simplified compliance
LLCs generally have fewer compliance requirements than corporations, which can make them easier and less expensive to maintain. For example, LLCs are not required to hold annual meetings or keep formal minutes of meetings like corporations are. LLCs are generally easier and less expensive to form than corporations, with fewer formalities and paperwork requirements. Illinois recently greatly reduced the cost of forming LLCs for Rental properties.
Forming an LLC for Your Rental Property
Most people can make an LLC for Rental Properties themselves. We do them for you here, if you’d like, and it’s quite cheap. However, I’ll walk you through the steps that you need to know to get the most out of your LLC for Rental Properties.
Choosing a Name for Your Rental Property LLC
The first step in forming an LLC in Illinois is to choose a name for your company. Your company name must be unique and not already registered with the Illinois Secretary of State. To ensure your name is available, you can check the Illinois Secretary of State’s website or contact their office. The Illinois LLC Act sets the naming rule. Under 805 ILCS 180/1-10(a)(1), the name “shall contain the terms ‘limited liability company’, ‘L.L.C.’, or ‘LLC’.” The same section bars words like “Corporation,” “Inc.,” “Ltd.,” and “Co.” There are some other keywords you’re not allowed to use, like Lawyers or Medicine.
Filing the Articles of Organization
Once you have chosen a name for your LLC, the next step is to file Articles of Organization with the Illinois Secretary of State. This document officially registers your LLC with the state and includes basic information about your company, such as its name, address, and registered agent. It also includes all the rules, bylaws, and property regulations for your rental property LLC. If this document has errors in it, your real estate closings will go wrong. You will need to keep a copy of it in a safe place, preferably with your closing attorney. If you read this and went “Huh?” you should call us and have us do this for you.
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Free Help with LLCs for Rental PropertyAppointing a Registered Agent
Illinois law requires every LLC to have a registered agent. A registered agent is a person or company that is authorized to receive legal documents on behalf of your LLC. The registered agent must have a physical address in Illinois and be available during business hours to receive legal documents. The Registered Agent will almost always be necessary in court if you’re doing an eviction.
Writing the Operating Agreement
While not required by Illinois law, creating an operating agreement is highly recommended for LLCs. An operating agreement is a legal document that outlines the ownership and management structure of your LLC. It also spells out how profits and losses will be distributed among the members. You need an Operating Agreement to make a bank account for an LLC for Rental Property. You will also need this to take loans, pay off debts or sell a home. However, you do not need the Operating Agreement to Buy a Home.
Getting Permits and Licenses for the Rental
Depending on the type of business you’re starting, you may need to obtain permits and licenses from the state or local government. You should assume you need a business license to make revenues with your LLC for Rental Properties. Most of the time it’s as simple as sending in one form and paying a fee. You can apply for your Chicago Rental LLC permit online. We also do the Zoning Certificates for you if you need those.
Getting Your FEIN
Getting a FEIN (Federal Employer Identification Number) for your LLC is a relatively straightforward process. You can do all of it online.
Determine whether you need a FEIN: You will need a FEIN if your LLC has employees, if you plan to open a business bank account, or if you file certain types of taxes. Basically, everybody should get an FEIN if you’re using an LLC for rental properties. If you are a single-member LLC with no employees, you may be able to use your personal Social Security number instead. I would only do this if you have only one property and do not plan to get more.
To apply for a FEIN, you can complete the online application on the IRS website. Alternatively, you can complete and submit Form SS-4 (Application for Employer Identification Number) by mail or fax. You should do the online application, it takes 15 minutes. You will need to provide information about your LLC, such as its name, address, and type of business activity.
Filing Form 8832
By default, certain types of business entities are classified in a particular way for tax purposes. For example, a single-member LLC is typically classified as a “disregarded entity” for tax purposes, which means that the LLC’s income and expenses are reported on the owner’s personal tax return. Similarly, a multi-member LLC is typically classified as a partnership for tax purposes, which means that the LLC’s income and expenses are reported on the members’ personal tax returns.
If you’re selling your rental properties, you’ll need to file this to not be a disregarded entity. Otherwise, FIRPTA will apply. Find Form 8832 and the instructions here.
Setting Up Illinois State Taxes (the Step Nobody Mentions)
In Illinois, the state tax identification number is also known as an Illinois Business Tax number (IBT). You will need an IBT number for your rental property LLC if you have property manager employees, rent commercial property or have certain types of tax liability. To obtain an IBT number, you will need to register with the Illinois Department of Revenue. You can do this online through the MyTax Illinois website, or by filling out Form REG-1, Illinois Business Registration Application. You will need to provide information such as your LLC’s name, federal employer identification number (EIN), business address, and type of business activity.
Then, you wait for your IBT number. You should receive your IBT number within 7-10 business days. If you have any questions or need assistance with the registration process, you can contact the Illinois Department of Revenue at 1-800-732-8866. If you don’t file this, you won’t be able to rent commercial property legally. You definitely won’t be able to rent short-term rentals in the city. You also might need this for your business license in Chicago or other Illinois areas.
Filing Annual Reports
LLCs in Illinois are required to file an Annual Report with the Secretary of State’s office each year. The report includes basic information about your LLC, such as its address and registered agent. Failure to file your Annual Report can result in your LLC being dissolved. It almost never gets there, but often you have to pay a few hundred dollars in extra fines. It’s better to just do this on time.
Should I Make a Series LLC?
Whether or not to use a Series LLC for rental properties is a decision that depends on your specific circumstances and goals. A Series LLC starts to make sense at roughly three or more rental properties, the same threshold used on my Series LLC and investor pages. Below three, the higher filing fees and per-series bookkeeping cost more than they save.
Asset protection:
One potential benefit of a Series LLC is that it allows you to segregate your rental properties into separate “series” within the LLC. This can provide some additional asset protection, as each series is treated as a separate legal entity, with its own liability shield. This means that if one of the series is sued, the assets of the other series are generally protected.
Cost and complexity:
Setting up a Series LLC can be more complex and expensive than setting up a traditional LLC. You will need to create an operating agreement that outlines the relationship between the main LLC and the individual series, and you may need to file additional paperwork with your state. Additionally, some states do not recognize Series LLCs, so if you own property in multiple states, you may need to create separate LLCs for each state.
Tax implications:
The tax implications of a Series LLC can be complex and will depend on your specific situation. In some cases, each series may be treated as a separate entity for tax purposes, which could result in additional tax filings and expenses. It’s worth it for the limited liability on your LLC for Rental Property. It’s also cheaper to do it this way than to make a different LLC for each rental home.
Management and control
The management and control of a Series LLC can be more complex than a traditional LLC, as each series may have different members or managers, with different rights and responsibilities. This can make it more difficult to manage and operate the LLC effectively.
What Are the Requirements for an LLC for Rental Properties in Illinois?
The risk grows the longer an LLC is neglected. Miss a formation detail, and you usually fix it with paperwork. Mix your personal money with the LLC’s, and you put the liability shield itself at risk. Skip the Annual Report, and the state can dissolve the LLC. Most owners pay a few hundred dollars in late fines before it gets that far. Keep a separate bank account, file the Annual Report on time, and pay the taxes the LLC owes.
How Much Does an LLC Cost in Illinois?
| Cost | Amount | What to know |
|---|---|---|
| State filing fee | $150 | Paid to the Illinois Secretary of State with the Articles of Organization. |
| Expedited filing (optional) | $100 | The state turns it around the same day. |
| Annual report | $75 a year | Every Illinois LLC files one each year. |
| My flat fee to form it | $750 | Includes the $150 state filing fee. |
| Registered agent service (optional) | $250 a year | You can act as your own registered agent instead. |
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Free Help with LLCs for Rental PropertyFrequently Asked Questions about LLCs for Rental Properties
Common questions about LLCs for rental property include the difference between an LLC and a corporation, how many rental properties can be owned under an LLC, whether an LLC can be formed after purchasing a rental property, whether an attorney is needed to form an LLC, and what an operating agreement is.
Q: Do I need to form an LLC for every rental property I own? A: No, you can form one LLC to cover multiple rental properties.
Q: Can I form my LLC after I buy the Rental Property? A: Yes, but you’ll have to pay to quit-claim deed the rental property into the LLC. It will cost you an extra $300-400.
Q: Can I manage my own LLC? A: Yes, you can manage your own LLC or hire a professional to help.
Q: Do I need an attorney to form an LLC? A: You should get one. It can cost you 4% of your margins if you do it wrong.
Q: What’s an operating agreement? A: It’s a 9-page long document that sets out the business rules for your LLC that a good business attorney drafts for you.
Already Own the Building in Your Own Name?
Then the fix is a quit-claim deed into the LLC. That runs about $300 to $400 on top of the formation. Send me the property address and how title is held today. I will tell you the cleanest order, and whether your lender needs to hear about it first.
Further Reading
Small Business Administration. (2021). Limited Liability Company (LLC). https://www.sba.gov/business-guide/launch-your-business/choose-business-structure/limited-liability-company
NOLO. (2021). How to Form an LLC in Your State. https://www.nolo.com/legal-encyclopedia/form-llc-how-to-organize-llc-30287.html
Forbes Advisor. (2021). Rental Property LLC: Pros and Cons.
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