Should I Start an LLC for My Property Management Business?
Starting a limited liability company (LLC) for your property management 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 property management business, lawsuits can arise from things like defaulting on a loan, defamation of a competitor, or personal injury suffered by customers in your offices.
LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your property management business seem more credible.
Recommended: Use Northwest to form an LLC for $29 (plus state fees).
Do I Need an LLC for a Property Management Business?
LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.
You should form 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 Management Business
By starting an LLC for your property management 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.
Property management businesses will benefit from liability protection because of the risk of being sued for property damage, personal injuries, and libel.
Example 1: Faced with the high startup costs of your property management business, you decided to take out a loan to finance this venture. After being unable to bring in clients and generate profit, it becomes clear that you will not be able to repay this loan. Therefore, the creditor sues your business for defaulting on this debt. Limited liability protects you from being personally responsible to satisfy any compensation levied against your business.
Example 2: During a meeting with a customer, an employee at your property management business walks into him, causing him to fall over and break his collar bone. As such, the injured customer brought a lawsuit against your business for this bodily harm. In the ensuing litigation, any liability imposed on your business to pay compensation cannot extend to your personal assets.
Example 3: In the marketing materials recently released by your property management business, one of your employees can be heard making a joke about a competitor based nearby. Hearing of this, the competitor decided to sue your business for slander, arguing that the joke negatively affected their reputation. In the following lawsuit, your personal assets are protected from being used to satisfy any business liabilities.
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 Management 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 management 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
Property management 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.
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
- Alabama LLC
- Alaska LLC
- Arizona LLC
- Arkansas LLC
- California LLC
- Colorado LLC
- Connecticut LLC
- Delaware LLC
- Florida LLC
- Georgia LLC
- Hawaii LLC
- Idaho LLC
- Illinois LLC
- Indiana LLC
- Iowa LLC
- Kansas LLC
- Kentucky LLC
- Louisiana LLC
- Maine LLC
- Maryland LLC
- Massachusetts LLC
- Michigan LLC
- Minnesota LLC
- Mississippi LLC
- Missouri LLC
- Montana LLC
- Nebraska LLC
- Nevada LLC
- New Hampshire LLC
- New Jersey LLC
- New Mexico LLC
- New York LLC
- North Carolina LLC
- North Dakota LLC
- Ohio LLC
- Oklahoma LLC
- Oregon LLC
- Pennsylvania LLC
- Rhode Island LLC
- South Carolina LLC
- South Dakota LLC
- Tennessee LLC
- Texas LLC
- Utah LLC
- Vermont LLC
- Virginia LLC
- Washington LLC
- Washington D.C. LLC
- West Virginia LLC
- Wisconsin LLC
- Wyoming LLC
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.
Insurance is particularly essential for property management businesses because of how valuable their assets (such as the properties themselves) are. Lawsuits may arise due to tenant dissatisfaction, employee injury, and perhaps more commonly, property damage.
Common Situations Business Insurance May Cover for a Property Management Business
Example 1: While bringing some files in from a storeroom, an employee accidentally knocks a client to the ground. The client breaks an arm in the fall and decides to sue your business for damages. General liability insurance would pay for your legal defense and any required settlement.
Example 2: A competitor files a lawsuit against you, claiming you libeled his business, While you disagree with the accusation, you know you need a lawyer to protect your interests. General liability insurance would cover your attorney fees and any required settlement.
Example 3: While visiting your place of business, a client slips on wet flooring in your restroom, breaks a wrist, and asks your company to pay for her medical treatment because you didn’t mark the wet floor. General liability insurance would pay for her medical expenses.
Other Types of Coverage Property Management 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 property management businesses should obtain.
Professional Liability Insurance
While you work hard to satisfy all of your clients with your property management services, there’s always a chance someone might decide you made a mistake that caused them injury. If a client sues your business for negligence, professional liability insurance would cover your legal fees and any required settlement.
Commercial Auto Insurance
Any vehicle you use primarily for your property management business requires commercial auto insurance to protect the vehicle, driver, and others on the road in the event of an accident. Be sure to select a policy that covers not only accident-related vehicle repair costs and medical treatment for anyone injured but also sufficient protection for any business materials you carry in your vehicle.
Workers’ Compensation Insurance
If you have any employees, most states will require you to carry workers’ compensation insurance for your part-time and full-time workers. This coverage protects your employees if they become injured at work or fall ill after a work-related accident. It not only covers an employee’s medical bills and lost wages if they need time to recover but also any disability or death benefits stemming from a workplace accident.
Commercial Umbrella Insurance
While your general liability insurance policy covers most claims, some accidents or lawsuits may be so catastrophic that they threaten to exhaust the limits of your primary coverage. Commercial umbrella insurance protects you from paying out-of-pocket for any legal fees and awarded damages that exceed your primary policy.
Should I Start an LLC FAQ
Which is better for my property management business — an LLC or sole proprietorship?
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.
What type of insurance does a property management business need?
At a minimum, you’ll need general liability insurance, workers’ compensation insurance, and commercial property insurance.
Read our Business Insurance for Property Management Businesses article for more info.
What are the costs to start and maintain a property management business?
The startup cost of your property management business varies depending on the number of properties you intend to manage. If you are planning on managing a number of different properties, the cost rises significantly, as you will likely have to pay for office space and the salaries of your staff.
Visit our How to Start a Property Management Business guide to learn more about the costs of starting and maintaining this business.
What are the ongoing expenses of running a property management business?
Rent, utilities, payroll, and insurance are the primary ongoing expenses of a property management business.
Learn more about running a property management business.
How do property management businesses make money?
A property management business either charges fees to manage someone else’s property or buys a property and earns money from lease payments.
Learn more about starting a property management business.
What is a property management business and is it profitable?
A property management business takes care of a particular property. This can include routine maintenance, emergencies like broken pipes, security, etc. A successful property management business also helps cut costs and reduce risks for property owners.
Profits depend on how many units the company manages, as well as its overhead costs.
Learn more about starting a property management business.