Table of Contents
I. Introduction to LLCs for Rental Property
Rental property ownership can be a lucrative investment, but it also comes with potential risks. One way to mitigate those risks is to form a limited liability company (LLC) for your rental properties. This article will explore the benefits of using LLCs for rental properties, the process of forming an LLC, and ongoing maintenance requirements.
II. Understanding how to Form a Rental Property LLC
LLCs are a type of business structure that provides personal liability protection for the owners while allowing for flexible management and tax options. Compared to other business structures, such as sole proprietorships or corporations, LLCs offer several advantages, such as simplified tax filing and reduced personal liability. However, forming an LLC can also come with some drawbacks, such as higher fees and more complex record-keeping requirements.
III Benefits of an LLC vs a Corporation
One of the primary benefits of using an LLC for rental property ownership is the protection it provides for personal assets. If an LLC is sued, the owners’ personal assets are shielded from liability. Additionally, LLCs can offer tax benefits by allowing for pass-through taxation, which can reduce the tax burden on rental income. Forming an LLC can also increase credibility with lenders and tenants, as it shows a higher level of professionalism and commitment to the rental business.
Limited liability protection
One of the main benefits of an LLC is that it provides limited liability protection to its owners. This means that the owners (also known as members) are generally not personally responsible for any debts or obligations of the LLC, including any legal claims or damages that may arise from rental property operations.
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.
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.
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.
IV 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.
Step 1: Choose a Name for Your LLC for Rental Properties
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. Your name must have the word Company in it, somewhere. There are some other keywords you’re not allowed to use, like Lawyers or Medicine.
Step 2: File 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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Step 3: Appoint a Registered Agent to the Rental Property LLC
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.
Step 4: Create an 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.
Step 5: Obtain the Required Permits and Licenses for Renting Properties with the LLC
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.
Step 6: Get 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.
Step 6B: File a 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.
Step 7: Set Up Your Illinois State Taxes for the LLC (That Nobody Ever 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.
Step 8: File 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. Series LLCs are only good once you get into the millions of dollars in assets and own several rental properties in the LLC.
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.
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.
V. What are the Requirements for an LLC for Rental Properties in Illinois
Ongoing maintenance of an LLC is crucial to keep the business in good standing. This includes filing annual reports, paying necessary taxes, and maintaining accurate financial records. LLCs must also keep personal and business finances separate to maintain liability protection. It’s essential to stay informed about any changes in state regulations or tax requirements to ensure compliance.
How Much does it Cost for an LLC in Illinois
- Filing fee: The filing fee to create an LLC in Illinois is $150. This fee is payable to the Illinois Secretary of State’s office and must be submitted with your Articles of Organization.
- Expedited filing fee (optional): If you need your LLC formation documents processed more quickly, you can pay an additional $100. They do same-day turnarounds.
- Annual report fee: LLCs in Illinois are required to file an annual report each year. The annual report fee is currently $75.
- Attorney or accountant fees (optional): While it is possible to form an LLC on your own, many people choose to work with an attorney to ensure that the formation process is completed correctly. We usually charge $650 to do it for you.
- Registered agent fee: LLCs in Illinois are required to have a registered agent, who receives legal and official correspondence on behalf of the LLC. You can act as your own registered agent or hire a third-party service to act as your registered agent. We charge $250 a year to do this.
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VI. Frequently 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.
Using an LLC for rental property ownership can provide significant benefits, such as personal liability protection, tax advantages, and increased credibility. However, forming and maintaining an LLC requires careful consideration and attention to legal and financial requirements. With the right research and preparation, an LLC can be a valuable tool for rental property owners.
VIII. 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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