Do you consider registering your short term rental as LLC? Generally, a short term rental LLC may be beneficial to your overall bottom line.
Many real estate investors prefer to invest in short term rentals because of their lucrative returns. Due to the growing popularity of Airbnb, many short term rental owners are able to make substantial profits from vacation rentals.
Table of Contents
- What Is an LLC?
- Pros and Cons of Turning Your Short Term Rental Into an LLC
- How to Set Up an LLC for Your Short Term Rental Property
- Invest in Short Term Rentals Successfully
- Frequently Asked Questions (FAQs)
Until today, many real estate investors prefer short term rentals. In fact, the short term rental industry is expected to remain strong despite the slight cooling down of the US housing market. It is the reason many investors prefer to buy an Airbnb for sale to stay on the safer side.
Since owning a short term rental is also owning a business, you need to register the business. To do so, you need to choose a business structure that’s right for your short term rental business. Most short term rental businesses are either sole proprietorships or limited liability companies (LLCs).
While a sole proprietorship business structure is simpler and more straightforward, it does not offer protection to your personal assets. Investors who are looking to protect their personal assets opt to register their short term rental businesses as LLCs. With an LLC, owners can enjoy the combined benefits of a corporation and a partnership.
In this article, we will discuss what an LLC is and the benefits and drawbacks of creating one. We will also help you decide whether it’s best to form a short term rental LLC or not.
What Is an LLC?
LLC, short for Limited Liability Company, is a type of business structure that limits the personal liability of its owners or members for the company’s debts. An LLC combines the characteristics of a corporation and the benefits of a sole proprietorship and a partnership.
In case the business is sued or faces financial difficulties, the owners won’t be personally responsible for paying for the company’s financial obligations. It means the lender or anyone with a claim on the company can not go after the business owners’ personal assets.
The regulations governing an LLC vary from one state to another. Typically, you can register any business as an LLC, except for certain entities like banks, insurance companies, and other financial institutions. To form an LLC, you must file an article of organization with the state where your business is located.
Articles of organization are legal documents that are needed to establish an LLC. The documents should outline the rights, duties, responsibilities, liabilities, and other obligations of each member of an LLC. The articles of organization should include basic information about the business being established, including the following:
- Name of the LLC
- Nature of the business or its purpose
- Names and addresses of the LLC’s members
- Name and address of the LLC’s registered agent
After filing the articles of organization, you will wait for the approval. Once approved, your business is then considered a separate entity and you can conduct business under the LLC’s own name.
LLCs are popular among small business owners and real estate investors owning short term rentals because of their flexibility and liability protection. By forming a short term rental LLC, you can protect your personal assets and operate under a separate legal entity.
Related: Real Estate Partnership vs LLC: Which Should I Form?
Pros and Cons of Turning Your Short Term Rental Into an LLC
Short term rentals are becoming increasingly popular, not just in the US but also around the world. With platforms like Airbnb, and other similar home-sharing providers, it’s easier for anyone to invest in and earn money from vacation rentals. It is why many investors are buying vacation rentals for sale instead of long term rental properties.
However, as with any kind of business, there are risks involved with a short term rental investment. They include liability and tax-related risks, among others. One way to protect yourself and your Airbnb business is by forming a short term rental LLC to make your business a separate entity.
In general, forming an LLC can help limit your personal liability in your business. However, before you decide to turn your short term rental into an LLC, it’s crucial to be aware of the benefits and drawbacks associated with it. In this section, we will explore the pros and cons of turning a short term rental business into an LLC.
Advantages of a Short Term Rental LLC
Converting your short term rental business into a limited liability company provides several benefits to your bottom line, including:
A common benefit of forming an LLC for your short term rental is that it provides liability protection. An LLC limits the owners’ personal liability for their company’s financial obligations. Converting your short term rental into an LLC protects your personal assets from any legal claims or debts that your business may incur.
Forming an LLC for your short term rental business offers several tax benefits, including avoiding double taxation. It is because with single-member and multiple-member LLCs, the business’s income is taxed as personal income of the LLC members.
Converting your Airbnb business into a short term rental LLC can lend a level of credibility and professionalism to your venture. Guests may be more likely to choose your rental over others if they see that you’ve taken the necessary steps to make your business a separate entity, protecting your business and personal assets.
Flexibility in Management
LLCs offer flexibility in management, as there is no board of directors or shareholders from whom you need to get approvals for your business decisions. The owners or members of the LLC can opt to manage the business themselves or hire a manager to take care of the business’s operations.
Easier Access to Funding
An LLC may find it easier to access funding opportunities than sole proprietorships or partnerships. Lenders and investors may be more willing to work with an LLC because it is a separate entity. Moreover, some business loans require that a business is registered as an LLC as part of the qualification process.
Related: 7 Best Loans for Investment Property in 2023
Disadvantages of a Short Term Rental LLC
While owning a short term rental LLC can be beneficial, there are also some drawbacks that you need to be aware of. Understand the said risks to help you decide whether or not LLC is the right business structure for you. Here are the disadvantages of a short term rental LLC:
LLCs are relatively more costly to form and maintain compared to a sole proprietorship or partnership. You need to pay for filing fees when you file your articles of organization. Additionally, you need to check with your state for any other ongoing costs.
On top of filing the articles of organization, you also need to draft an operating agreement and obtain necessary permits. The process can be time-consuming and may require the assistance of a lawyer or accountant (which may add to your overall cost).
LLCs can be more complex to operate than sole proprietorships or partnerships. Depending on which state you’re located, there may be several paperwork that you need to comply with even after registration. The documents include annual reports, annual statements, statements of information, periodic reports, and more.
Lack of Privacy
LLCs are required to file public documents, such as articles of organization and annual reports, which may disclose personal information about the owners or members. The lack of privacy may be a concern for some business owners who own an Airbnb investment.
Depending on where your short term rental property is located, the tax laws may not work in your favor as an LLC short term rental owner. In some states, you may face additional tax liabilities as an LLC business. For instance, if you buy short term rentals for sale in California, you might be required to pay a recurring annual franchise tax.
Other Things to Consider for Short Term Rental LLC
Before you register your short term rental as an LLC, you also need to be aware of the following:
- Personal Guarantee: While turning your short term rental into an LLC can protect your personal assets in most cases, there are some situations in which personal liability may still be a concern. For example, you may still be held personally liable if you apply for a business credit card or personally guarantee a business loan.
- Financing Options: Being an LLC business typically opens more opportunities for business financing. However, some lenders require that you provide a personal guarantee as part of the approval process. If you do so, you’ll still be personally liable for the business loan should your short term rental business fail to pay its debts.
- Separation of vacation rental properties: If you own multiple vacation rental properties, you can help protect each property from liability claims by setting up separate LLCs for each vacation rental property. It means that if a claim is made against one property, your other vacation rentals will not be affected.
- Short term rental accounting: It’s easier to separate your business and personal expenses if you set up a short term rental LLC. It will help avoid tax miscalculations, making accounting smoother come tax season.
How to Set Up an LLC for Your Short Term Rental Property
If you’re running an Airbnb business and you want to limit your personal liability, the best course of action is to set it up as a short term rental LLC. Use the following steps to guide you through the process:
Step 1: Contact Your Lender
If you have an existing mortgage for your vacation rental property, make sure to contact your lender first and ask if they allow you to transfer the title to the new business name. Find out the additional requirements for the transfer and any associated fees. It’s possible that the terms and interest rates of the loan may change, so it’s best to ask the lender about this.
Related: 3 Best Investment Property Lenders for 2023
Step 2: Choose a Name
The next step is to choose a name for your short term rental LLC that is unique and not already used by another business. The name should also comply with any state rules and regulations for naming an LLC. You can check with your state’s Secretary of State office to see if your chosen name is available.
Step 3: File Articles of Organization
After choosing a name, you will need to file articles of organization with your state’s Secretary of State. The document outlines the basic information about your LLC, such as its name and address. It should also include the names and addresses of the owners or members.
Step 4: Create an LLC Operating Agreement
An operating agreement outlines the rules and regulations for your LLC, including how it will be managed and how profits and losses will be distributed. It should also include what happens if a member wants to leave the LLC.
Step 5: Obtain an EIN
An Employer Identification Number (EIN) is a unique identifier for your LLC. The IRS requires any entity to secure an EIN for tax purposes. You can apply for an EIN online through the IRS website.
Step 6: Obtain Necessary Permits and Licenses
Depending on where your short term rental property is located, you may need to obtain certain permits and licenses to be able to register as a short term rental LLC. In most cases, you will need a business license or a permit to operate a short term rental in your area. Check your local short term rental regulations to see what other licenses are required.
Step 7: Open a Business Bank Account
Once you have your LLC set up, it’s important to keep your business and personal finances separate. You should open a separate business bank account for your LLC and use it for all business-related transactions.
Step 8: Transfer Your Title to Your Business Name
The next step is to transfer your title to the LLC, giving the LLC full ownership of your short term rental properties. You need to create a Quit Claim Deed to do it. The said document shall assign yourself as the “Grantor,” while the short term rental LLC will be the “Grantee.” Check your County Clerk’s website for the instructions for filing a Quit Claim Deed.
Step 9: Maintain Compliance
After setting up your LLC, make sure to comply with all city, state, and federal regulations. It includes filing annual reports, paying taxes, and adhering to the short term rental rules and regulations in your city.
Invest in Short Term Rentals Successfully
Whatever business structure you choose, it’s important to know the right location for your investment property to be successful. Whether you set up a short term rental LLC or remain a sole proprietorship business, make sure to invest in the right technology to help you become a profitable Airbnb owner.
Mashvisor is a real estate analytics platform that helps investors find the best investment property.
Mashvisor’s Market Finder tool, for instance, can help you determine the best places for short term rental investment. You can use the tool to identify the best rental markets in and out of your state for your chosen investment strategy. You can filter your search according to your desired Mashmeter Score, listing price, property type, rental income, occupancy rate, and more.
You can also access the Property Finder tool that lets you search for a profitable investment property to invest in using predictive analytics. You can access the property data and analysis and use the Airbnb calculator to ensure that you’re buying a property that matches your investment goals and search criteria.
Start a 7-day free trial with Mashvisor today to explore our real estate tools and see how they can help you make a profitable investment.
Frequently Asked Questions (FAQs)
Read on to find answers to your most frequently asked questions about setting up an LLC and investing in short term rentals.
In What State Should I Register Your LLC?
You should register your short term rental LLC where it is legally operating a business. For example, if you own a vacation rental in one of the best locations for Airbnb, you should register your LLC where your short term rental property is located.
What If I Own Short Term Rentals in Multiple States?
If you own multiple properties in different states, you need to form an LLC in your home state first. Then, register the other properties as foreign LLCs in the states where they are located.
Which One Is Better, LLC or Simple Sole Proprietorship?
The right business structure depends on your preference. With an LLC as a short term rental business, you limit your personal liability, keeping your business a separate entity. On the other hand, a Simple Sole Proprietorship (SSP) does not. Also, only sole proprietors are allowed to open an SSP. If you have a business partner, you should set up your business as an LLC.
However, even if you solely own the business, you may still register as an LLC. Some short term rental owners might find that the SSP is a better option because of its simplicity. However, there’s no separation of the business with an SSP. If you prefer protection, it’s best to register your short term rental as an LLC.