If you are an owner of a rental property, either for residential or commercial space, it is wise to form a LLC to deal with your property. It is a given fact that this type of business is very unpredictable. If you will not be aware of the ins and outs of the industry, then you can be in litigation. But if you are a smart investor, you have an insurance ready for cases like that. To ensure a more organize flow of your operation, it is best to put your rental property under a LLC. Though this might not be the ideal option, but it restricts the claims of LLC creditors to the LLC assets as well as protects your home and business from the creditors.
Take a look at some of these cases so you can fully understand the importance of LLC. The limitation on liability is not idea. If you are liable for doing some jobs like removing of snow and you did not do it and unfortunately such removal resulted to an injury, you can probably be involved as the person liable for such job and not simply as the owner. The role of LLC will limit your contractual liability to the point that the contract is only within the LLC and the other party and in not secured by you.
If you categorize your LLC with only one proprietor, you will be free from filing your own tax returns. It can belong under the Schedule C on your personal tax return. However, if your LLC has two proprietors, like husband and wife, you will need to file a separate partnership tax return. If you are married and one of you happens to be the LLC owner, one of you can receive the LLC membership if the initial owner dies. The long and short of it, a multiple-member LLC needs to file its own tax return. As married couples and want to have a more organized procedure, you need to be comfortable the one of your will own the LLC.
To be able to give the limited liability that is usually presented by the LLC entity, you have to claim that LLC is distinct from you. It should have its own bank account. You are not allowed to use any amount, from LLC’s bank account, for personal purposes. And the LLC must be the one to engage in any contract and not the owner itself.
Lastly, your mortgage holder may not be in favor about your transfer of ownership of your property to the LLC. Most of these mortgages would require you to pay off the balance before any necessary transaction is done. In mortgages, if you plan to transfer the real estate property into a LLC, it should be considered sold first. But there are cases that you can renegotiate this rule if you put up LLCs for rental properties. There are also other cases that they conduct the transfer hoping that the mortgage holder will not be aware of the transaction. But be careful with the risk involve when you do this. The lender can any time consider the loan due because of the violations made under the due on sale clause. This is in the case if you have successfully transferred the property and was caught by the lender. And once the loan is called due you may either refinance it or must be paid in full. The worse consequence of your actions is that you might end up paying a more expensive loan later on.
With all of these pointers, think it over and decide whether LLC option will work best on your business.
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