LLC for rental property - FAQ

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

small-business

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.