What is Certificate of Good Standing | How to Apply

Even after the formation of your LLC or corporation, you will still require many different documents for various reasons. One of the most important is the “Certificate of Good Standing“.

Also known as “Certificate of Authorization” and “Certificate of Existence”, it is issued by the state in which your business is registered.

What is this certificate? Does every LLC or corporation need to have this certificate? All of this and much more discussed in the post below.

What is a Certificate of Good Standing?

The Certificate of Good Standing is a state-issued certificate. It shows that an LLC or corporation is authorized to conduct business and meets the statutory requirements of that state. In simple words, it confirms that the business is legally registered in the state which grants it the certificate.

Apart from this, it also shows that your business has-

• Paid all the required fees to the state
• Paid franchise tax
• Filed annual report

Even an entity whose formation is in a particular state but wants to register in a new state as a foreign entity should also have the Certificate of Good Standing. The certificate comes with an expiry date before which the business should renew the certificate.

But note that the certificate is not similar to occupational or business license which is mandatory to conduct business in a state. State-registered companies which do not have this certificate can still conduct business in that state legally.

Why LLC or Corporation Need the Certificate of Good Standing?

While the certificate is generally not mandatory, many of the LLCs and corporations still need to get one for a number of reasons. Some common reasons are-

• Maintaining their own records
• State government requirement when using foreign qualifications
• Lender requirement when trying to acquire financing
• Set up a new business bank account
• Attract potential business buyers or companions in foreign countries
• Renewing some types of business permits or licenses
• Business promotion

What does Certificate of Good Standing – Include?

A Certificate of Good Standing usually includes the following information-

• Trading name and number of the company
• Incorporation or formation date of the company
• A statement which confirms that the company is in existence since its incorporation or formation
• Statement from Registrar which proves that the company is not in liquidation and is not subject to any kind of administration order
• Statement from Registrar to confirm that the company has not selected any receiver or manager of the company property
• Declaration by Companies House which affirms that there are no actions against the company to strike it off or make it invalid

Does a Sole Proprietorship Need a Certificate of Good Standing?

NO, A sole proprietorship is not a state registered entity. Thus, a sole proprietorship does not need a Certificate of Good Standing.

Apart from an LLC and corporation, some of the states also require limited liability partnerships, limited partnerships, partnerships, etc. to have a Certificate of Good Standing.

How to Get a Certificate of Good Standing?

Secretary of State or other equivalent agency which is responsible for maintaining state records and filing entities issues Certificate of Good Standing. For instance, the Divisions of Corporations issues the certificate in Delaware and State Corporation Commission is responsible for issuing this certificate in Virginia.

Even if your corporation or LLC is in existence for just a few days, you can still get this certificate.

You can know more about the documents you will need and the fee for applying at the official website of the agency that issues the certificate. There are also several 3rd party companies in almost every state that can apply for the certificate on your behalf.

Can the Secretary of State or Other Equivalent Agency Deny My Certificate of Good Standing Application?

Yes, it is possible for a state agency to deny your certificate application. Some common reasons due to which the state agency may not issue a certificate are-

• The Confirmation Statement or accounts of your company are not up to date
• You have not provided information regarding the control, ownership, or constitution of your company
• The company does not have the required number of officers

Conclusion

Businesses which register at state-level such as LLCs and corporation can get themselves the Certificate of Good Standing as and when needed. The certificate is not mandatory if an entity only conducts business in the state where it is formed. But a large number of enterprises still get the certificate due to many reasons as discussed above.

If you want to apply for the certificate, visit the state agency’s office of your state to know more about the application process and fee. You can also work with a 3rd party company which will prepare and file all the documents necessary for the certificate on your behalf.

The post What is Certificate of Good Standing | How to Apply appeared first on .

source https://businessentity.org/learning-center/what-is-certificate-of-good-standing-application-requirements/

Is LLC a Corporation (INC) | Difference Between LLC and Corporation

LLC or Limited Liability Company is currently one of the most common and popular business forms in the US.

From limited personal asset protection to the tax benefits, there are several reasons for businesses to prefer LLC.

LLCs combine the benefits of a corporation and sole proprietorship or partnership. While this hybrid structure is one of the most significant advantages of LLCs, the structure is also confusing for new entrepreneurs.

A lot of entrepreneurs wanting to register themselves as LLCs generally have several queries with regards to the business structure.

One of the most common queries is whether an LLC is a corporation or gets the corporate treatment for tax purposes.

If you are looking for a straightforward answer to this question, you should surely read this post in its entirety.

What is an LLC?

LLC or Limited Liability Company is a type of private limited company. It is one of the simplest business structures after sole proprietorship. LLC structure offers many benefits generally available with the corporation and sole proprietorship or partnership.

If the business has a single owner, the LLC can be a Single Member LLC. If there are two or more owners, it is a Multi-Member LLC. The LLC business structure is popularly known as a pass-through business structure. This means that all the profits and losses of the LLC will pass through the personal income tax of the owner/s.

With LLC, the owner gets limited personal asset protection. This helps in protecting their personal assets if someone files a lawsuit against the LLC. Such protection is not available with a sole proprietorship.

What is a Corporation?

The corporation is a more complex business structure as compared to LLCs. Unlike LLCs, the profits and losses of the corporation do not pass through the business owner. A corporation is a separate legal entity, and its taxation is separate from the owner.

For creating a corporation, you have to file organization forms and assign shareholders. To oversee the operations of your business, you will also require the Board of Directors. Just like LLCs, the corporation also offers limited personal asset protection.

LLC as a Corporation

A Single Member LLC gets the option to select between a disregarded entity or a corporation for tax purposes. In case if you choose disregarded entity, your LLCs tax treatment will be similar to that of a sole proprietorship. Similarly, a Multi-Member LLC can be a partnership or a corporation for tax purposes.

So, it is possible for an LLC to be considered a corporation. But for this, the owner/s of the LLC have to elect the corporation structure for tax purposes.

When Do LLCs Elect to Be Treated as a Corporation?

Corporations are subject to double taxation. It means that the business dividends are taxable and the owner/s is also required to pay personal income tax. It is a significant reason why LLC owners prefer to be treated as disregarded entities.

However, the corporate structure proves to be more beneficial to some LLC owners in case they have high taxable income. But only switch to corporate tax structure if the tax savings will be higher even after considering double taxation.

There are also some other reasons why an LLC can consider the corporate tax structure. Some common reasons are-

• Owners are looking for venture capital
• Owners have plans to sell the business in future
• Owners want more flexible profit sharing
• Companies want to offer employee benefits and health insurance to the employees
• Owners want to grow the business further through the profit the business generates
• Owners wish to have a more organized management structure
• Owners want to offer the stock option to the employees

S Corporation and C Corporation

LLCs that want to be a corporation for tax purposes again have two choices- S corporation and C corporation. When an LLC applies to incorporate, C corporation is the default formation. However, if all the shareholders of the corporation agree to file as S corporation, the C corporation can become an S corporation.

A lot of LLCs go with the S corporation tax status to make the business income pass through their personal tax returns. This means that S corporation tax structure can be used for avoiding double taxation.

All the business income will pass through the individual tax returns of the owners, eliminating the requirement for filing a corporate tax return.

Conclusion

Most LLCs generally stick to the LLC structure due to the benefits it offers. But in some cases, the corporate structure can prove more beneficial for some LLCs.

So, yes, an LLC can be a corporation for tax purposes. However, LLCs do not get the corporate tax structure by default. They need to elect the structure after considering the benefits and drawbacks with respect to their business.

Even with the corporate structure, an LLC has to select between S corp and C corp after thoroughly understanding the structures. As this decision is a complex one, LLCs wanting to switch to the corporate tax structure, generally rely on professional legal help.

The post Is LLC a Corporation (INC) | Difference Between LLC and Corporation appeared first on .

source https://businessentity.org/learning-center/llc/is-llc-a-corporation-inc-difference-between-llc-and-corporation/

A lot of sole proprietors wanting to grow their business prefer the LLC business structure.

But search about LLCs, and you will come across terms such as “single member LLC” and “multi-member LLCs” very commonly.

What is a single-member LLC or SMLLC? How is it different from other business structures?

This post will answer all of these questions to help you understand LLCs better.

What is a Single-Member LLC (SMLLC)?

As the name suggests, a single-member LLC or Limited Liability Company is a business entity with a single owner (known as a member). The SMLLC functions as a legal entity of its own which is separate from its owner.

As it is an LLC, it offers some level of personal liability protection which the LLC business structure is well-known for.

Taxation of SMLLC

Single-member LLCs get the option to select the taxation structure of a disregarded entity or a corporation. If it chooses the former, its taxation will be similar to a sole proprietorship. With this tax structure, the SMLLC will report all the business income through the personal income tax of the owner.

SMLLC taxation as a corporation is generally an option for owners who have very high taxable income, including the net income of their LLC. In such cases, taxation as a corporation can help yield lower taxes.

But with the corporation tax structure, the owner will also be subject to double taxation. So, select the corporate structure only if the tax savings are significant. Most SMLLCs generally prefer the disregarded entity structure.

Other Differences Between SMLLC and Corporation

There are some significant differences between the activities of an SMLLC owner and corporation owner. Two of the biggest differences are as follows-

• The SMLLC owner is not an employee and does not receive a salary from the SMLLC. Instead, he/she can take money from the business at any time. The same is not true for corporation owners.
  
• Similarly, the SMLLC owner can put his/her money in the business at any time. The personal funds of the owner can be used for the same. Corporation owners cannot do this.

Difference Between SMLLC and Sole Proprietorship

A sole proprietorship and SMLLC are both sole entities. However, SMLLC business structure is known to offer some significant benefits over a sole proprietorship. For instance-

• SMLLC or LLC for that matter is a business structure separate from the owner. It is not identified or attached to the owner for liability or taxes.
• SMLLC offers personal liability protection which sole proprietorship does not.
• SMLLCs are legitimate business entities which need “LLC” in their business name.
• As SMLLCs are legitimate business entities, they are generally more credible than sole proprietorships. This makes them a better option for clients and investors.

Disadvantages of SMLLC

While SMLLCs offer some great benefits over sole proprietorship and corporation, there are some drawbacks too.

For instance, the personal liability protection offered by SMLLC has its limitations. There are several cases in which the personal assets of the owner can still be at risk if someone files a lawsuit against the SMLLC.

Also, there is a lot of additional paperwork with LLCs or SMLLCs as you will have to file annual reports. Paperwork is considerably lower with a sole proprietorship. However, it is not as complex as a corporation.

Unlike a corporation, there is no need for an SMLLC to have shareholders and board of directors. This makes them less formal and affects their business credibility too. As a result, a lot of SMLLCs struggle when it comes to raising equity capital or applying for credit.

Forming an SMLLC

If you are planning to establish an SMLLC, you should contact the business division of your department of state. While the requirements generally vary between states, most states will require you to-

• Select an SMLLC name
• File Articles of Organization by paying a filing fee
• Create Operating Agreement
• Publish public notice
• Apply for permits and licenses

Conclusion

As you can see, a single-member LLC offers some great benefits in comparison with other business structures like a corporation or sole proprietorship. While there are some drawbacks too, the benefits are considerably more valuable.

If you want to take your business a step forward or wish to register a new company, now you can decide whether SMLLC is the right choice for you. You can also look for professional help to make the right business decision.

The post What is a Single-Member LLC (SMLLC)? appeared first on .

source https://businessentity.org/learning-center/what-is-a-single-member-llc-smllc/

Do You Need EIN Number for Your LLC?

LLC or Limited Liability Company is one of the most popular business structures. Sole proprietors looking to grow their business prefer going the LLC way. It is also a common choice for people registering their business for the first time.

People often refer to this business structure as a hybrid structure. That is because it combines the benefits and characteristics of a corporation and a sole proprietorship or partnership.

But while most business owners know that partnerships and corporations need EIN, there is still a lot of confusion about whether an LLC needs one.

As you might know, EIN or Employee Identification Number is a nine-digit IRS assigned unique number used for tax purposes.

But does your LLC need an EIN? Let us try to find an answer to this question.

LLC Classification

To understand whether or not you need an EIN for your LLC, you first need to understand the classification of LLCs.

LLCs are state statute created entities. The IRS can treat them as a partnership, corporation, or a disregarded entity as per the number of members of an LLCs and the elections made by them.

Generally, an LLC is classified as a partnership for tax purposes if it has at least two members and has not filed Form 8832 to elect its treatment as a corporation. If an LLC has a single member, its treatment is similar to a disregarded entity which is separate from the owner with regards to income tax purposes.

Single-Member LLCs and EIN

If a single-member LLCs treatment is not like a corporation, it functions as a disregarded entity. All the activities of the LLC are reflected on the federal tax return of the owner. Reporting of all the profits and losses of the LLC is along with the personal income tax statement of the owner.

So, the owner can use his/her Social Security Number (SSN) for the tax returns and might not need an EIN. But if a single-member LLC has employees, you will need to get an EIN. Also, if you pay the excise tax, tobacco, firearm, or alcohol tax, you will require an EIN as a single-member LLC as well.

Others Reasons Why Single-Member LLCs Might Require EIN

Apart from the reasons listed above, there are some other reasons why a single-member LLC might require an EIN. Some of the reasons are-

• Your business has a Keogh plan
• You want to open a business account
• You want to obtain business licenses
• You want to obtain a credit line
• Protection against identity theft
• Filing bankruptcy

Multi-Member LLCs and EIN

Apart from single-member LLCs in some cases, all the other types of LLCs should have an EIN. Multi-member LLCs function as partnerships by default for tax purposes unless they do not elect to function as a corporation.

But as it is compulsory for partnerships and corporations to obtain an EIN, every multi-member LLC requires an EIN as well.

Applying for an EIN

Now that you know whether or not you require an EIN, the next step is to understand how to apply for it. Fortunately, applying for an EIN is very easy and can be done online. Visit the IRS website and look for EIN Assistant. To apply for EIN, you will have to submit form SS4 and provide identification and business details for the same.

Once the form submission is successful, the IRS will go through your application. If everything is fine, you will receive your EIN within 1-2 working days. Apart from the online application, you can also apply for EIN through email, fax, and phone. But applying online is the fastest and most convenient.

Apply here: https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online/

Conclusion

So, if you are a single-member LLC with no employees, it is possible that you might not require an EIN. Just your SSN would do. But if you elect corporation business structure, have employees, or fulfill any of the other requirements listed in this post, an EIN is a must.

A lot of single-member LLCs that do not need EIN still apply for one due to many reasons. Apart from single-member LLCs in some cases, all the other types of LLCs should have an EIN.

As compared to the past, applying for the EIN is now easier and faster due to the online application process. While you can still go the traditional way and apply for EIN through email, fax or phone, most businesses generally prefer the online method.

The post Do You Need EIN Number for Your LLC? appeared first on .

source https://businessentity.org/learning-center/do-you-need-ein-number-for-your-llc/

Does Sole Proprietorship Need an EIN Number?

A sole proprietorship is the simplest and most common forms of business.

But while this business structure is easier to form, you still need to comply with the licensing, zoning, and local requirements and regulations of your state.

While searching for the prerequisites of forming a sole proprietorship, you might often come across something known as EIN.

This EIN or Employee Identification Number is a nine-digit unique number assigned by the IRS to businesses for tax purposes. Just as individuals have SSN (Social Security Number), enterprises have EIN.

But will your sole proprietorship need an EIN too? Maybe or maybe not!

Let us have a look at when a sole proprietorship does and does not require an EIN.

Does a Sole Proprietorship Need an EIN?

In a sole proprietorship, a single proprietor owns and manages the businesses and all of its transactions. The single business owner pays business income tax along with his/her personal income tax payments.

So, the sole proprietor or owner of the business can just use his/her SSN for all the business tax purposes. This means that it is not legally compulsory for a sole proprietorship to have an EIN.

However, there are a few cases in which a sole proprietorship might need an EIN. Even if you do not relate to such cases defined by the IRS, a sole proprietorship can still get an EIN for the benefits it offers.

Cases in Which a Sole Proprietorship Needs an EIN

As per IRS, a sole proprietorship needs an EIN if-

• You want to hire employees
• You are buying an existing business
• You have 401(k) or Keogh
• You are inheriting a business
• You want to form a partnership, LLC or incorporate
• You want to file for bankruptcy
• You want to obtain a credit line

Moreover, many banks require almost every type of business to have an EIN for opening a business bank account. Also, as a business entity, you can obtain certain local business licenses if you have an EIN.

Even if you do not belong to any of the categories listed above, you can still apply for an EIN for the benefits it offers.

Benefits of EIN For Sole Proprietor

Following are two of the most important benefits of having an EIN as a sole proprietor-

• Protection Against Identity Theft- Without an EIN, you will have to use your SSN at many places. Identity thieves might access your SSN and then use the same for filing fraudulent tax returns.
• Business Credibility- Having an EIN is an easy way to improve the impression that people have of your sole proprietorship. An EIN  establishes the fact explicitly that you are an independent owner and contractor and not an employee.

Applying for EIN

Applying for an EIN is easy and free. You can visit the IRS website and file Form SS-4 to apply for an EIN. Once the IRS validates your submission, you will receive your EIN within 1-2 working days. Apart from the online application, you can also apply for EIN through email, fax, and phone.

There are no restrictions by the IRS on the number of businesses you can own. But you will need a different EIN for each of your companies. Within 24 hours, you can only get up to 5 EINs.

This is irrespective of whether you are applying them for a sole proprietorship, LLC, corporation or partnership.

Conclusion

So, the decision about having or not having an EIN for your sole proprietorship is in your hands. While there are many benefits with EIN, you might also skip it entirely if you are starting a business. Just get the state or local permits or licenses that you need for your business, and you are good to go.

But ultimately, as your business will grow, you might need an EIN. Also, do consider the benefits of having an EIN even if you are not legally required to have it. EIN can make your business safer and more credible.

And with the availability of the online application, the whole process of applying and receiving an EIN is easy and quick. Moreover, it is completely free too. So, if you ever need the EIN in the future, just visit the IRS website to find all the help you need.

The post Does Sole Proprietorship Need an EIN Number? appeared first on .

source https://businessentity.org/learning-center/does-sole-proprietorship-need-an-ein-number/

What is an EIN Number? How to Apply For One

Starting a new business can be an overwhelming experience.

But now that your business is finally registered as an LLC, corporation or partnership, the next important step is to get an EIN.

Employee Identification Number or EIN is a nine-digit number which the Internal Revenue Service (IRS) assigns to your business.

In this post, I’ll be covering everything you need to know about EIN and answering questions like:

• But why do you need EIN?
• Does every business need to apply for an EIN?
• How to apply?
• Do they expire?

Continue reading to know everything about EIN.

What is an EIN?

As mentioned above, EIN or Employee Identification Number is a unique nine-digit number assigned to a business by the IRS for tax purposes.

The number is in XX-XXXXXXX format.

Think of this EIN as the Social Security Number which individuals have. Most of the businesses need an EIN but some might not.

Once your business registration receives approval, you can then apply for an EIN. Apart from the tax purposes, you also require EIN to

• Apply for business licenses
• Get a credit line
• Open a business bank account

Does Every Business Need an EIN?

As per IRS, a business needs EIN if:

• The business has employees
• The business taxation is as an LLC, partnership, or C corporation
• The business files excise taxes, employment taxes, tobacco, firearm, or alcohol tax returns
• The business has a Keogh plan
• The company withholds taxes on the income which it pays to non-resident aliens
• The business works with trusts, non-profit organizations, employee plans, real estate mortgage investment conduits, estates, or farmers’ cooperatives

Companies that do not belong to any of the categories listed above might still need an EIN to open a business account, apply for business licenses, or get a credit line.

What About Sole Proprietor? Do They Need EIN As Well?

If you do not have any employees in your sole proprietorship, you might not need an EIN. As you will file the income taxes of your business along with your personal taxes, you can use the Social Security Number as business taxpayer ID for tax purposes.  

But if you want to form a partnership or LLC or incorporate, you will need an EIN. The same is true if you’re going to file for bankruptcy as well. While a lot of Sole Proprietors are not legally required to have an EIN, they still have one for many reasons.

For instance, many of the independent contractors that function as sole proprietors do have an EIN to protect themselves against identity theft.

When Do You NOT Need a New EIN?

As per IRS, you should not apply for a new EIN if-

• Your corporation or partnership declares bankruptcy
• The business name is changed
• The corporation wants S corporation tax structure
• Business location is changed, or new location/s is added (Use Form 8822 for Address Change)
• Business wants to make changes to its taxation structure

Do EINs Expire?

No, EINs do not expire. The IRS will never assign the same nine numbers to any other business even if the original business shuts down. But while the number does not expire, you will have to apply for a new EIN if you want to change your business structure.

For instance, if you have an EIN as a sole proprietor and want to form an LLC, you need to apply for a new EIN.

How to Apply for EIN?

Applying for EIN is easy and completely free. You can apply online, or by email, fax, or phone. Most businesses prefer applying online. Visit the IRS website where you can find an EIN Assistant which you can use to apply for an EIN.

To apply for EIN, you will have to file an SS-4 form. You will also need your Individual Taxpayer Identification Number (ITIN) or Social Security Number (SSN) to file this form. Moreover, you will also have to provide details about the type of business you are operating or are about to register.

Once your documents are validated, you will receive your EIN within 1-2 working days.

Responsible Party for EIN

When you apply for an EIN, you need to name a ‘Responsible Party’. Irrespective of how many owners or members a business has, there can only be a single Responsible Party. The Responsible Party will be the point of contact between the IRS and your business.

You will need to provide the personal information of the Responsible Party while applying for the EIN online.

What If the EIN is Lost or I Forget the EIN?

Do not panic if you lose or forget your EIN. It is very easy to get it back. Firstly, try to find the IRS notice which businesses receive when they first get their EIN. If you are not able to find it, go through the employee payroll records and bank account information.

Businesses also use EIN in their state account application. You can go through those records as well. You can also check the small business tax returns for your EIN.

The last option is to get in touch with the IRS through their Business and Specialty Tax Line at 1-800-829-4933. TTY/TDD: 1-800-829-4059.

To get your EIN, you will have to provide identifying information when you call the IRS.

For security reasons, the IRS will only provide the EIN to authorized persons.  This includes a corporate officer, sole proprietor, member of LLC, a partner in a partnership, or similar roles.

Conclusion

Almost all the registered businesses are legally required to have an EIN. Even a lot of companies that do not need EIN generally apply for one to either open a business bank account or to get local business licenses.

Now that you know what EIN is and whether you need it, you are one step closer to running a business of your own. If you do require the EIN, apply for it as soon as possible to check off another important step from your to-do list as a new business owner. If not, it is still advisable to remember the information or bookmark this post as you might need EIN in the future as your business grows.

The post What is an EIN Number? How to Apply For One appeared first on .

source https://businessentity.org/learning-center/what-is-an-ein-number-how-to-apply/

Should You Create An LLC For Your Rental Property – Pros & Cons

Are you planning to create an LLC for your rental property?

Are you sure about the decision or are you just following the herd?

In the past, the only option for real estate investors looking for limited liability protection was to form a corporation for acquiring title. But for real estate property owners, the business structure of a corporation has a few potential drawbacks.

Since the introduction of LLC (Limited Liability Company) structure, most rental property owners now prefer creating an LLC for their properties. Popularly known as a hybrid business structure, LLC combines the tax benefits of a partnership and limited liability advantage of a corporation.

So, should you go ahead with your decision? The only way to know is by understanding the pros and cons of creating an LLC for your rental property. As no single answer is applicable to all the landlords, understanding the benefits and drawbacks will make you more confident.

So, let us start with the pros first, followed by the drawbacks.

Pros of Creating an LLC for Your Rental Property

1. Limited Liability Protection

Needless to say, the most significant advantage of creating an LLC is the limited liability protection it offers. The business structure protects your financial assets in case a lawsuit is filed against you. For instance, let us assume that your tenant throws a party at your property and one of the guests falls over the balcony and hurts himself.

It is very much possible that the guest might file an “unsafe condition” claim against your property and as the owner, your name will appear in the lawsuit. If the rental property belongs to an LLC, only the assets that the LLC owns would be at risk. All of your personal assets would remain protected.

Sepate LLC for Each Rental Property?

In this regard, if you have multiple rental properties, it is recommended that you create a separate LLC for each of the properties. If a single LLC owns all of your rental properties, in case of a lawsuit on any one of the properties, all of your properties would be at risk. With separate LLCs, just the assets of the LLC which owns the property on which the lawsuit is filed would be at risk.

2. Pass-Through Tax Benefits

An LLC is a pass-through business entity. This means that the profits and losses of your LLC are passed through the LLC members (owners), and they then report the same on their personal tax return. However, this is not the case with corporations like C corporations which are subject to double taxation.

Moreover, by creating an LLC, the owner can also avoid the double taxation on the rental income as well as the appreciation in the cost of the property when it is sold. Also, if you are a single-member LLC, the interest of your mortgage can also be deducted just like a sole proprietorship.

In case if it is a multi-member LLC, each of the members will only be required to report a portion (corresponding to their investment they put in the LLC) of the profits and losses on the personal tax returns they file.

3. Other Important Benefits

There are a few other essential benefits of creating an LLC for your rental properties. For instance, it is easier to keep your personal expenses separate from the business expenses by forming an LLC. Moreover, as compared to partnerships and corporations, LLCs offer greater flexibility in terms of profit distribution and transfer of interest rights.

Also, as compared to corporations, LLCs are generally required to pay lower state registration fees in most of the states. As far as delegating management responsibilities is concerned, LLCs have more flexibility as compared to a corporation or a partnership.

With a corporation, it is mandatory to have directors and officers in your company. But with an LLC, the owner(s) or 3rd party managers can handle the business operations.

Cons of Creating an LLC for Your Rental Property

1. Cost of Forming and Maintaining an LLC

Talking about the cons, the most important one is related to the cost of forming and maintaining an LLC. You will be required to pay fees for setting up your LLC. If you have multiple properties in multiple states and you want to create a separate LLC for each of them, you will be required to pay fees for setting up each of them.

Apart from setting up the LLC, you will also need a lawyer for tax preparation and filing taxes every year. The fees for setting up an LLC and their ongoing and annual fees vary between states. So, ensure that you check the same on your Secretary of State’s website.

2. Personal Asset Protection is Not Guaranteed

While personal asset protection is the most significant benefit of forming an LLC, the protection has its limitations. There are several situations or circumstances in which a plaintiff can bypass this corporate veil to hold LLC member(s) liable for obligations and debts.

For instance, if you fail to do a job that was your personal liability such as pool maintenance or snow removal and it resulted in an injury to the tenant, you can be individually liable for the same. Deceptive business practices or frauds can also hold your personally responsible.

Is Buying an Insurance a Good Option?

A lot of property owners rather than forming an LLC prefer purchasing a liability and umbrella insurance. While the coverage will not prevent your tenants from filing a personal lawsuit against you, the insurance cover might be able to pay for the damages.

However, if at all the insurance coverage is not adequate to pay for the lawsuit, you will have to pay the remaining amount from your pockets. Also, insurance policies generally have a lot of exclusions too which can get you in trouble in case of a lawsuit. So, check the exclusions if you are going with this option.

Conclusion

Now that you have the most important pros and cons of forming an LLC as a rental property owner mentioned above, you might probably have a fair idea about what you should do. With LLC, you will get personal asset protection, tax benefits and a host of other benefits. However, personal asset protection is limited, and there are costs for forming and maintaining an LLC.

As the decision is a complicated one, it is better to consult with a financial advisor, attorney or CPA as their expertise would help you know if creating an LLC is beneficial to you.

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source https://businessentity.org/learning-center/should-you-create-an-llc-for-your-rental-property-pros-cons/