For many, becoming a landlord means incorporating either as an LLC or a corporation to protect their own personal funds. By incorporating, the liability shifts from the landlord to the corporation. This safeguards the landlord’s own personal assets and funds. The process of incorporating rental properties is relatively simple and straightforward.
Select a Business Entity
The first step is to determine what type of business entity you want to form. There are four main types of entities: C corporations, S corporations, LLCs (Limited Liability Company), and sole proprietorships.
In this case, you can rule out sole proprietorships as they don’t offer the liability protection the other entities offer.
Most landlords choose to incorporate property under an LLC rather than an S or C corporation. This is primarily because an LLC allows for flexibility in the management of their property and does not require the same formalities that corporations require. For example, LLCs are not required to hold annual meetings. At the same time, an LLC will still provide you with protection from liability.
S and C corporations are also an option for landlords, and also provide some benefits. For example, an S corporation will provide you with liability protection, but also passes any profits or losses through the company directly to you.
If you’re still in the beginning stages and learning how to be a landlord, we can help. We provide essential documents that every landlord needs. We can even help you through the incorporation process and answer any questions you may have.
Select an Incorporating State
Once you’ve selected a business entity, you’ll need to determine which state you will incorporate in. For most landlords, this is an easy decision. If you live in the same state as your rental property, it’s much easier and more affordable to incorporate property there.
If you’re planning on becoming a landlord in another state, you can choose to incorporate either in the state you live in or in the state the property is located in. Which one you choose will depend on how many properties you own and whether or not you plan on purchasing more out-of-state properties in the future.
Incorporating in the state where your property is located may require a higher filing fee, and your annual corporate report will also cost more to file. If you choose to incorporate in your home state, however, you can register to do business in the state where your property is located.
If you plan on becoming a landlord in the near future and have yet to purchase property, you might consider incorporating before you make your first investment.
If you already own rental property, you will be required to transfer the title of the property to your LLC or corporation in order to gain liability protection. Transferring the property may be a simple or complicated process depending on your mortgage. Some mortgages have a due on sale clause that will require you to pay off the mortgage when you transfer the title.
No matter whether you’re just learning how to be a landlord or have many years of experience, incorporating will provide you with the liability protection you need to keep your own personal funds safe. When you do decide to incorporate property under a separate business entity, you’ll need the help of an experienced lawyer and accountant to help you through the process.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.