When buying property for rental in the USA, property owners should be well aware of the current laws so as to safeguard their property and assets. As with any business, risks of lawsuits are a reality. Property owners should be made aware that they can never be 100% safeguarded, but being well informed certainly helps. Owning one or several properties for the purpose of rental is a business and should be appropriately registered. Once you become a landlord, you will have clients, income and expenses. Registering a company through either LLC or Corporation offers the best protection as your personal assets are separated from the business assets and are considered separate entities.
LC is a Limited Liability Company which offers a combination of the laws governing the Sole Proprietorship and Corporation, and offers the best of both worlds. Claims to the Company will be limited to the assets of the company only and your personal assets cannot be touched. If there are several properties, it is also a good idea to set up an LLC company for each property, to protect the other properties from being seized to settle a claim which arose on one of the properties. It is however important to note that if you have a mortgage on the property, you will need to check the conditions of the mortgage as a transfer from your personal name to an LLC company is considered a sale and the mortgage company might not approve the transfer. It must also be noted that it is very difficult to obtain a loan for a property if it will be registered in an LLC company, even with a personal guarantee attached.
An LLC company allows for a degree of flexibility in the choice of the taxation method, thereby avoiding “double” taxation on profits and dividends earned. The other tax advantage of this type of company is that the current tax threshold is $250,000 and if income is below this amount, the gross taxation does not apply. This is also a very good reason why an investor should open an LLC company for each property instead of putting them all into the same company. An LLC company is quick to open and registration fees are very low but offer a lot of possible choices which need careful consideration.
A Corporation has a much simpler structure than an LLC but does not allow for flexibility of choice for tax purposes although it is not subject to the gross receipts tax. There are no Federal taxes and only 1.5% of the Net Taxable Income is due to the Government by the Shareholders. It is also possible for a Corporation to provide insurance and pension benefits to its Shareholders, contrary to any other type of entity. In a disagreement between Shareholders in a corporation, it is possible for one Shareholder to buy out the other leaving the corporation intact whereas in a LLC, this could require that the Company be liquidated.
However, it must be pointed that in either of the above entities, it is not possible to fully secure the Landlord’s personal assets. If a Tenant proves that the Landlord was personally at fault for the damages he incurred by the Tennant, the Landlord’s personal assets may be seized. Deciding how to register depends a lot on the owner’s personal circumstances. It is recommended before making a decision, to seek advice from a legal adviser as well as a financial advisor, as both will approach the subject from a different angle, to help you make the right decision.
