Should I Start an LLC for My Rental Property Business?

Starting a limited liability company (LLC) for your home rental business can provide several benefits.

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For a home rental business, lawsuits can arise from things like breach of duty claims (e.g., failing to carry out reasonable and necessary repairs, etc.), discrimination claims, or insurance disputes.

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your home rental business seem more credible.

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

Do I Need an LLC for a Property Rental Business?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should start an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for a Property Rental Business

By starting an LLC for your property rental business, you can:

Protect your savings, car, and house with limited liability protection
Have more tax benefits and options
Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Home rental businesses will benefit from liability protection because of the risk of property damage, injuries, and other general business risks.

Example 1: One of your tenants alleged that your business, their landlord, had failed to make promised repairs to their property. As a consequence, the tenant brought a lawsuit against your home rental business for this breach of contract. Limited liability would protect your personal assets, such as your car and home, from any requirement to pay damages the court imposes on your business.

Example 2: A tenant broke a leg after falling through a set of defective stairs in their house that your home rental business had refused to fix. This prompted the tenant to sue your business for this personal injury they claim to have suffered as a result of your negligence. In this instance, only the assets belonging to your business could be used to satisfy any settlements the court awards.

Example 3: A discrimination lawsuit is brought against your home rental business after claims by a tenant that they had been charged higher rent as a result of their race. In the following lawsuit, the court cannot pursue your personal assets in order to secure appropriate damages for the plaintiff.

Example 4: A tenant requests maintenance on their HVAC system during the winter. You miss the request, and the tenant sues you for neglecting to provide heat during the cold.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for a Property Rental Business

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if a property rental business owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

Home rental businesses rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.

Northwest will start an LLC for you for just $29 (plus state fees).

Get Started

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

You can hire a professional LLC formation service to set up your LLC for a small fee
Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

All businesses need insurance to protect their business assets — even LLCs. This is because the limited liability protection from an LLC protects your personal assets, not your business assets. Home rental businesses own incredibly valuable assets (namely, the very properties they rent), rendering it even more pertinent to have insurance.

Common Situations Business Insurance May Cover for a Home Rental Business

Example 1: You make a mistake while fixing some issues in one of your rental properties and cause a small fire that damages your renter’s furniture. Since they do not have renter’s insurance, they are suing you to replace all damaged items. General liability insurance will pay for legal representation and third-party damages awarded by the court.

Example 2: Your handyman hasn’t had time to fix the protruding bricks on your rental’s walkway, and a visitor trips and falls as a result. His injury requires surgery and several weeks out of work. If a lawsuit arises from these injuries, your general liability policy will cover you up to the limits of the policy.

Example 3: You have purchased a new rental in a neighborhood with a homeowners’ association. The HOA requires evidence of liability insurance for all rental properties. General liability insurance should cover this requirement.

Other Types of Coverage Home Rental Businesses Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all home rental businesses should obtain.

Landlord Insurance

Rental properties require special coverage that is not included in your standard homeowners' policy. Landlord insurance offers coverage similar to both commercial property insurance and homeowners. It pays to repair or rebuild the damaged building, offers limited coverage for the personal property kept onsite, and offers fair rental value coverage while the landlord cannot collect rent after a covered loss.

Landlord insurance can be written for all types of rentals, including single-family dwellings, quads, triplexes, and duplexes.

Workers Compensation Insurance

If you employ a team to keep up with your rental properties, your state may require you to purchase workers' compensation insurance. The policy extends coverage to employees involved in an on-the-job accident, including payment for medical bills and lost wages.

Commercial Umbrella Liability Insurance

Given today’s litigious society, landlords with significant assets should consider purchasing a commercial umbrella policy. If a substantial loss occurs, your underlying general liability limits could be reached, leaving you responsible for the difference. An umbrella policy takes over where the GL leaves off, keeping your personal and professional assets protected.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance and commercial property insurance.

Read our Business Insurance article for more info.

Naturally, significant startup costs are involved in the founding of a home rental business. It is important to note that the rules for financing properties differ for those dictating personal home ownership. At the moment, investors who own in excess of four rental properties must put 25% down, whereas those with less only require 20%.

Visit our How to Start a Property Rental Business guide to learn more about the costs of starting and maintaining this business.

Ongoing expenses of running a property rental business include mortgage payments, insurance, maintenance, utilities, and property taxes.

Learn more about running a property rental business.

Home rental businesses make money by renting out their properties for a rent higher in value than the property’s expenses.

Learn more about starting a property rental business.

The size of the rental industry in the US is estimated at $173.4 billion. Growth in urban populations drives demand for rental properties in urban areas.

Rental properties are a dependable source of passive income for their owners, and they typically increase in value over time.

Learn more about starting a property rental business.