How can you best structure your Littleton investment property to minimize your risk and increase your earnings? A lot of landlords ask us about the value of setting their investments up as Limited Liability Companies, or LLCs. We want to talk with you about the options.
At Assured Management, we aren’t attorneys or accountants, and you should consult with both of those professionals before you make any major business decisions. We’re offering our thoughts and advice based on our years of experience as property managers in Littleton. Talk to your CPA or your financial advisor before you do anything in terms of business structuring.
Let’s take a look at the pros and cons of the LLC option.
Littleton Investment Property and LLCs
A limited liability company (LLC), is a type of business structure that is essentially both a corporation and a partnership. Like a corporation, an LLC will provide you with protection, or limited liability, in the event the business fails or runs into trouble. You don’t have to be at risk personally, and you can also have any of the LLC’s earnings taxed as part of your own income.
Those are the two most advantageous reasons for using an LLC.
You’re Personally Protected from Lawsuits and Claims
The primary reason to buy and hold your investment in an LLC is that it protects you from liability and lawsuits. What will happen if the roof at your rental property collapses a day after your tenant reports the problem, but before you were able to respond to it? That’s going to be a big lawsuit. Suppose a tenant’s guest is injured on the steps in your property or has a major accident in your driveway? All of this risk is ever-present in a rental home.
There’s liability insurance for you and, if you require it, renter’s insurance for your tenant to protect you. But, as the property owner, you will be the target of any lawsuits or insurance claims. You don’t want to see your personal funds at risk.
When you own the property in your own name, you and all of your assets are easy for plaintiffs to go after in those lawsuits. But, when an LLC owns your property, your personal liability is limited. Claimants and plaintiffs cannot come after your personal finances or assets in a lawsuit. They’d be suing the LLC instead of you, personally.
An LLC Separates Business and Personal Interests
We know it’s easy for landlords to become emotionally attached to a property. You can think of it as your own, even while other people pay to live there. But when you decide to rent out a Littleton property as an LLC, you’re essentially opening up and running a small business. Having your rental property in an LLC may make it easier for you to think about your property as a business that earns income. You’ll make decisions from a business perspective, not a personal one.
This is another excellent reason to put your property or properties into an LLC. Your business interests and assets are separate from your personal interests and assets. If there’s a lawsuit, no one can come after you and the home you’re living in. Only the LLC owns the rental property.
Protecting Your Identity with an LLC
Another great reason to operate within an LLC when you have rental real estate is that you can protect your identity. No one has to know who owns your property when the LLC is listed as the property owner. This can protect you from a disgruntled tenant who may want to complain. It can also keep you unnamed online and in tax records.
Many rental property owners prefer this anonymity. It’s why you work with a Littleton property manager; so you don’t have to be the one signing the lease agreement, talking with your tenants, and responding to every question or complaint they may have.
Setting Up an LLC in Littleton
If you decide that an LLC is the best way to go, there are some simple steps for creating your company in Colorado. You can even do it online, through the Colorado Secretary of State’s website. Here’s what to do:
Name your LLC. You’ll need a name for the company that holds each rental property or your entire portfolio of rental properties. Note that the business name actually needs to include LLC or Limited Liability Company. This is required in Colorado.
Choose a registered agent for your LLC. This is the person authorized to receive service of process or other authorized and legal documents on behalf of the LLC. This might be you or your Littleton property manager.
File Articles of Organization. You’ll file these through the state’s website. This establishes some basic information about your business, including who you are, where you operate, and what kind of business you are.
Pay the required fees. These will also have to be paid online. Currently, it costs $50 to file the Articles of Organization and $25 to reserve your LLC name.
In Colorado, limited liability companies must submit a periodic report to the Secretary of State. This documentation ensures all information about your LLC is accurate and up to date. The report is also vital for maintaining your business’s “good standing.”
LLC owners typically get notified when their periodic reports are due. The process is completed online, and you only pay a $10 filing fee if you complete everything on time. Should you submit your paperwork late, you are required to pay a $50 charge.
Talk to your tax and accounting professionals as well as a lawyer if you have a lot of assets and you’re wondering how to best protect them. An LLC makes sense for a lot of reasons, but there may be an argument for remaining a sole proprietorship, putting the property in a trust, or starting a corporation.
We can help you work through the options before you talk to your financial planner. Please contact us at Assured Management, Lakewood property management experts serving residential landlords in West Denver and the surrounding areas, including Littleton, Golden, Wheat Ridge, Arvada, and more.