LLC for rental property - FAQ
If you own a rental property or are considering purchasing one an LLC is an excellent way to protect your other assets form liability. LLCs are easy to set up, inexpensive to run, and can be tailored to your specific company requirements.
LLC for rental property
An LLC is a separate business entity formed according to state statute. While it functions as a legal company and if run correctly has the same asset protection as a regular corporation, it is much less cumbersome to operate in terms of statutory requirements. The individual owners of an LLC are called “members,” and most states do not restrict the type of ownership or the number of members. Members of an LLC can be corporations, other LLCs, foreign entities, and/or individuals.
One of the most popular reason to form an LLC in Colorado is because you can create an LLC as a “single-member” LLC with just one owner. Many people who own rental property choose to house their investment in this legal structure. Rather than holding rental property as a sole proprietorship as an individual, a real estate investor may consider forming a single-member LLC to hold investment property. LLCs also allow more then one investor to buy or manage a property together with a simple operating agreement ( a must to avoid conflict) delineating the agreement.
The Pros of “housing” your rental property in an LLC structure:
· LLCs are business entities distinct from the members and are easier and less expensive to create and manage compared to a corporation.
· An LLC can generally have an unlimited number of members, which may make an LLC a good vehicle to consider for group investing.
· Members of an LLC may provide equity capital, debt financing in the form of a loan to an LLC, or a combination of both.
· Single-member LLCs may be formed to hold rental property as an alternative to owning property in a personal name or “doing business as” (DBA) name, thereby protecting the owner’s other assets from liability for the rental property.
· Income or losses from a rental property held in an LLC are passed through to each member and reported on individual tax returns, with income taxes paid based on each member’s individual rate, avoiding the double taxation of corporate profits.
· Other business and personal assets of each member are generally protected from legal liability or creditor claims in the event of a lawsuit or bankruptcy.
· Members of an LLC also may buy and sell their individual shares without having to sell the actual rental property, based on the rules outlined in an LLC’s operating agreement.
The Cons of “housing” your rental property in an LLC structure:
· LLCs must file annual tax returns (even though LLCs generally do not pay taxes) and provide each member with a Schedule K-1 to report each member’s share of income or losses, deductions, and credits.
· Member liability protection from an LLC may be limited if an LLC is proven to have done something illegal or if the LLC does not adhere to recommended practices, such as not comingling personal funds.
· While individual members of an LLC may be able to sell their shares, some states require an existing LLC to be dissolved and a new LLC to be formed if there is a change in membership (not Colorado).
· Raising additional capital may also be more difficult with an LLC structure, compared to a corporation, such as an S Corporation, which may sell shares of additional stock rather than taking out a bank loan.
I enjoy helping start their businesses and am happy to consult about whether an LLC is a good fit for your business venture. It’s always exciting to hear about new companies and I am happy to discuss the legal requirements and answer questions. You can schedule a quick complimentary consult here.
Corporate Compliance
Whether you are operating as a Limited Liability Company or a Corporation in Colorado, it is important to keep your business in compliance with statutory requirements so that your personal assets are protected from any liability that your business might incur. Here is a checklist that will help you gauge whether your business is in compliance and if not what you might need to address.
- Filing with secretary of state. Colorado requires that all companies file an annual report. If you are not sure about the status of your company go to the secretary of state’s website and make sure you are in compliance with this requirement. http://www.sos.state.co.us/pubs/business/businessHome.html
- Operating agreement or bylaws. While Colorado does not require that an LLC have an operating agreement, the operating agreement is critical in terms of both company management and asset protection. Colorado does require that all Corporations have written bylaws.
- Company records. If your company is a corporation, Colorado requires that you keep the following items with your corporate records at your principal place of business:
- The Articles of Incorporation and bylaws
- Minutes from all director and shareholder meetings over the past three years
- All written communications to shareholders over the past three years
- A record of all actions taken by directors or shareholders without a meeting
- A record of all actions taken by a committee of the board of directors in place of a meeting
- A record of all waivers of notices of meetings of the shareholders, directors or any committee of the board of directors
- A record of the names and addresses of all shareholders, arranged alphabetically and by class of shares
- A list of the names and business addresses of current directors and officers
- A copy of the most recent annual report
- All financial statements for the past three years
- Separate bank account. Whether you are operating as an LLC or a corporation, you should keep a separate bank account for your entity and use it for all transactions. You should be able to document all moneys put into your entity in return for your ownership.
- Acting on behalf of the company. Any interactions you have in the course of doing business with other commercial enterprises or individuals should be clearly on behalf of the company and not as yourself individually. For instance, if I give a speech on estate planning I give the speech as Tanya Shimer of Tanya R. Shimer LLC and not just as myself individually.
- Written documents. Use letterhead on all of your correspondence and contracts.
- Entity designation. Always include the entity designation (“Inc.,” “Limited,” “Ltd.,” “LLC”) whenever possible on business identifiers such as business cards, advertisements, signs, etc.
- Your signature. Always sign documents in your representative capacity, and not as an individual:
YOUR ENTITY NAME
______________________________________________
by: YOUR NAME, YOUR TITLE (Manager, President, Owner, etc.)
- Titles of assets. Ensure that all assets that are owned by your company are titled in the name of your entity and not in your name personally.
- Keeping money separate. Be careful to never commingle the funds or assets of your entity with your personal funds and assets. If you need to fund the operations of your company with your personal assets, document the transfer as either a loan or a contribution to the capital of your entity. If you need to use assets of the company for personal reasons, distribute the assets out of the company to yourself first as income, profit distributions, or a return of your capital contribution.
- Annual meetings. Whether you are a corporation or an LLC, annual meetings are required This is one of the first things a judge will look for in deciding whether to allow a creditor or other to go after your personal assets.
- Corporate taxes and fees. Work with a professional to make sure that you are in compliance with all corporate taxes and fees and that your income tax returns are filed each year in compliance with both the IRS and the Colorado Department of Revenue.
While this checklist is not meant to be all inclusive its a good start and good self monitoring system for both you and your employees. I certainly hope that it helps! Don't hesitate to contact me if you have questions about your company and these guidelines.
LLCs and Taxation
Many of my clients are curious about forming LLCs and how they are treated for tax purposes. In Colorado, a limited liability company is considered to be a pass-through entity and is treated like a partnership or sole proprietorship for tax purposes. All of the profits and losses of the LLC pass through the business to the LLC members (owners) who then report this information on their personal tax returns. The LLC itself does not pay federal income taxes.
If the LLC is owned by a single member, the IRS treats it as a sole proprietorship for tax purposes. This means that the LLC itself does not pay taxes and does not have to file a return with the IRS. The sole owner of the LLC reports all profits or losses and submits it with his or her 1040 tax return. If the company makes a profit, even if the member leaves this money in the company, he or she must still report this and pay taxes on this money at the end of the year.
If the LLC is a multi-member LLC, the IRS treats it as a partnership for tax purposes. This means that multi-member LLCs do not pay taxes on business income. Instead, the LLC members each pay taxes on their share of the profits on their personal income tax returns. The LLC members’ share of profits and losses, called a distributive share (usually ownership percentage), should be set out in the LLC operating agreement.
Most operating agreements provide that a member's distributive share is in proportion to his or her percentage interest in the business. If the members decide to split up profits and losses in a way that is not in proportion to the members' percentage interests in the business, it's called a special allocation. The IRS has guidelines as to how this works.
The IRS treats each LLC member as though the member receives his or her entire distributive share each year. This means that each LLC member must pay taxes on his or her whole distributive share, whether or not the LLC actually distributes all (or any of) the money to the members. The practical significance of this is that even if LLC members need to leave profits in the LLC, each LLC member is liable for income tax on his or her rightful share of the profits left in the company.
As a result, if the members intend to keep a substantial amount of profits in the LLC (retained earnings), the members might benefit from electing corporate taxation. Any LLC can choose to be treated like a corporation for tax purposes by filing a form with the IRS within a certain time frame of the LLCs formation.
Important Documents Locator and Contacts
Clients always ask me how to store their estate planning documents and other important papers once their estate plan is done. I always recommend that they fill out the attached Important Document Locator and Contact Sheet as a part of this process so that family members and friends know who to contact and where to locate important records if necessary. I also recommend that they store their estate planning documents as follows:
Originals. Your original Will should be kept in a safe place, preferably in a fireproof safe or safe deposit box. Your original powers of attorney can be kept in your reference notebook. If you have revised or updated your documents, any old/former documents—including any copies—should be shredded.
Reference Set. If I did your estate plan, you have been provided with a reference set of your documents in an estate planning binder, creating complete set for your records. The copy of the will in this binder is not signed—you have only one valid, executed will, which you should keep pursuant to #1, above. If you decide to provide anyone with a copy of your will, be sure to copy the unsigned, reference will and not the original, signed will.
Copies for Agent. You should provide your agents with copies of your executed Powers of Attorney, both General and Medical. This will enable them to have the documents and act upon them without the necessity of obtaining copies once a disability or other unfortunate circumstance occurs. They should also be told about your complete estate planning binder (if you have one) and where it is located.
Copies for Physicians. You should also provide your physicians with copies of your executed Medical Power of Attorney and Living Will. They will then be able to keep these important documents in your files so that your agents will not have to search for them in the event of illness or accident.
Copies for Home. For clients living alone, especially aged clients, I recommend that copies of your Medical Powers and Living Will be kept in a readily accessible location such as your refrigerator or freezer in the kitchen, along with a note on the refrigerator door indicating that the documents may be found inside. First responders are taught to check the refrigerator door for important medical and pharmacological information. Finding the Medical Power of Attorney and Living Will along with other such information will make their treatment decisions easier, and better insure that your dignity is protected.
Fill out the Important Document Locator and Important Contact Information forms that follow. Keep them in a safe but obvious place such as the inside of a desk drawer or kitchen cabinet near the telephone. This will help your family members and friends in the event of an emergency and also might result in you feeling more organized and in control of your life!
Important Documents Locator and Contacts
DOCUMENT
LOCATION
NOTES
Durable Power of Attorney
Medical Power of Attorney
Original Last Will and/or Trust Documents
Living Will/MOST declaration
Property Deeds
CD Certificates
Personal Banking Accounts
Promissory Notes
Automobile Registrations
Birth, Marriage and Death Certificates
Medical Insurance
Passports
Retirement/Pension Accounts
Life Insurance Accounts
Credit Card Accounts
Stock and Bond Certificates
Long-term care insurance
Safety deposit box information/key
Internet accounts and passwords information
IMPORTANT CONTACTS
NAME
TELEPHONE NUMBER/EMAIL
Agent for health care power of attorney
Agent for general durable power of attorney
Person named as personal representative in will
Attorney
Accountant
Insurance Providers
HomeAutoLife InsuranceLong-term Care
Primary Care Physician
AdultsChildren
Personal friend/housesitterfamiliar with home
Veterinarian
Child care provider
Children’s school contact
Children’s local guardian
Children’s preferred babysitter
If you have a hard time printing these sheets I am happy to email you a copy either as a PDF or as a word document that you can customize to suit your needs. Just send me an email and let me know.
Are your personal assets protected from your business liability? Business Foundation Checklist
For the last six months I have been a part of a wonderful business- coaching group by Cheri Ruskus of the
Besides affording me the opportunity to learn and share with an amazing group of women entrepreneurs, I also have a new perspective and much better understanding on how to run my business from a business perspective rather then a lawyer's perspective. I am grateful and most pleased because I am sure that it will help me advise my clients better in running their businesses as well.Many of my clients own businesses and/or rental properties. I encourage them to meet with me on a yearly basis to review their business compliance and or landlord obligations - with the goal of making sure that their
personal assets
(such as their residence, savings, retirement, etc.) are protected should anything happen related to the business or rental property. If you don't have a proper business legally set up for either a business you are running or properties you are renting-- then your personal assets are at stake and up for grabs if your business or rental incurs liability. If you do have a proper legal foundation and your business is properly recognized, your personal assets will most likely be protected should something happen. I am always happy to meet with business owners and or property owners to review their business compliance needs and make sure their personal assets are protected. Check out the business compliance checklist below - for a quick self review.
Business success is not just about creativity and breaking through - its also about planning and having a solid legal foundation
Business Foundation Check List
Does your business follow these simple steps:
- Have you filed the appropriate documents with the secretary of state and if so are they kept up to date?
- Do you have a working operating agreement or bylaws for your company and is your company notebook current?
- Do you use a bank account (usually a checking account) in the name of your entity?
- Can you ensure that you can document all moneys put into your entity in return for your ownership.
- Is it clear that any interactions your entity has with other commercial enterprises or individuals that you are acting on behalf of your entity and not as an individual?
- Do you use letterhead on all of your correspondence and contracts?
- Do you include the entity designation ("Inc.," "Limited," "Ltd.," "LLC") whenever possible on business identifiers such as business cards, advertisements, etc.?
- Do you sign documents in your representative capacity, and not as an individual:
YOUR ENTITY NAME ______________________________________________
by: YOUR NAME, YOUR TITLE (Manager, President, Owner, etc.)
- Have you ensured that all assets that are meant to be owned by your company are titled in the name of your entity and not in your name personally.
- Are you careful to never commingle the funds or assets of your entity with your personal funds and assets. If you need to fund the operations of your company with your personal assets, document the transfer as either a loan or a contribution to the capital of your entity. If you need to use assets of the company for personal reasons, distribute the assets out of the company to yourself first as income, profit distributions, or a return of your capital contribution?
- Have you held your annual meetings - yes - annually?! This is one of the first things a judge will look for in deciding whether to allow a creditor or other to go after your personal assets.