Rental properties can be an excellent way to produce an income. With the ability to hire property managers and the ease with which you can look up maintenance and repair companies anywhere, landlords do not even need to live in the same city or state as their rental properties. Despite the many benefits of owning rental properties, there can be some significant risks associated with doing so, such as tenants who refuse to leave or significantly damage the property. However, one of the biggest risks may be the threat of lawsuits. To mitigate risk, and to take advantage of other possible benefits, many landlords consider forming a limited liability company (LLC) and putting the property in it. Is this necessary? What are the pros and cons of putting rental property in an LLC? The experienced real estate attorneys at Business Law Group may be able to answer these and other questions about owning rental property in Louisiana. Call (504) 446-6506 for a consultation to learn more about your options for legally protecting yourself when you own real estate for rental purposes.

What Is an LLC in Louisiana?

An LLC is a form of business structure. There are four other kinds of business structures in Louisiana: corporations, sole proprietorships, partnerships, and limited liability partnerships. Each of these structures has their own benefits and drawbacks. The structure chosen for a particular business is based on several factors and should not be chosen randomly.

Louisiana RS §12:1301 defines an LLC as an entity that is an unincorporated entity which has one or more members, as well as being organized and existing under Chapter 22. The law also references domestic LLCs, which are those formed under the laws of Louisiana, and foreign LLCs. Foreign LLCs are those formed under the laws of any state other than Louisiana. If a landlord is considering putting rental property in an LLC, both domestic and foreign LLCs can be used for this purpose. 

How Do I Start an LLC in Louisiana?

Starting any business in Louisiana requires filing the appropriate paperwork with the Louisiana Secretary of State. The documents must be in compliance with the state's requirements, including being notarized, paying the required filing fee, and being accompanied by a certificate of good standing or existence. These documents can be filed online, in person, or by fax. 

When someone wishes to form an LLC, but may not be prepared to do so immediately, they can check for LLC name availability and reserve the name for 120 days. This requires filing a reservation application and paying a $25 reservation fee. This can be beneficial for those who know they want to form an LLC and have a name they would like to use but need to attend to other matters before they can officially form the LLC. 

Pros of Putting Rental Property in an LLC

There are several advantages to putting rental property in an LLC. However, each situation is unique. Business Law Group recommends landlords or potential landlords consult with an attorney to discuss their specific circumstances to determine whether an LLC is appropriate for their needs. 

Tax Savings

If the LLC has only one member, the Internal Revenue Service (IRS) allows it to be treated as if it is not separate from its owner, or as a “disregarded entity.” As a disregarded entity, the sole member includes the LLC on their tax return and the LLC is not taxed separately. This can result in tax savings. 

However, the single member can also elect to file IRS Form 8832 and elect for the LLC to be treated as a corporation. If they do, the LLC will be taxed as such. Additionally, LLCs owned by at least two members are treated as partnerships for tax purposes. 

Limits Personal Liability

Landlords are responsible for the properties they rent. This means that landlords are at risk of lawsuits if a tenant, visitor to the property, lender, buyer, or other aggrieved party sues because they have been injured or have another grievance related to the property. These lawsuits can become extremely expensive, particularly if the landlord loses and must pay damages as well as both their own attorney's fees and possibly the other party's attorney fees. 

By putting rental property in an LLC, landlords can limit their personal liability. If someone wishes to file a lawsuit related to the property in the LLC, they must file it against the LLC rather than the landlord as an individual. This means the landlord's personal assets are not at risk in the lawsuit. 

Separates Business and Personal Assets

This advantage is related to the limited liability that an LLC offers in the event of a lawsuit. If a landlord opts to form one or more LLCs and is putting rental property in an LLC, this help to show a clear separation between business and personal assets. This also assists in proving a separation between business and personal finances. 

While it is possible to open separate bank accounts and credit cards for the rental property without an LLC, by putting rental property in an LLC, landlords distance themselves personally even more from liability. Using an LLC requires the LLC to have its own bank accounts and credit cards. This makes it more difficult for another party to “pierce the veil” and try to claim that there is no difference between the landlord themselves and the LLC and thus, be able to access the landlord's personal assets in a lawsuit. 

Potentially Protect Each Property From Other Properties

LLCs separate business assets from personal assets. All the assets in an LLC are vulnerable to liability from any of the other assets in the same LLC. For example, if a landlord has two properties in an LLC, and a lawsuit is filed against the LLC for an injury on one of the properties, and the other party wins the lawsuit and files a lien, that lien can be filed against both properties in the LLC, rather than just the property where the injury happened. 

In order to protect each property from any other properties, the landlord would need to form an LLC for each property. While this is a benefit, it may also be considered a drawback. Landlords may wish to speak with an attorney to determine whether they need multiple LLCs to separate each property when putting rental property in an LLC. 

Own Property With a Partner

While it is possible to own rental property with a partner without putting rental property in an LLC, it can be more complicated that way. There will be questions about whose account the rent will be deposited into, who will pay for repairs and other details. Additionally, it can be harder to ensure a fair and equitable split of the profits. 

By putting rental property in an LLC, two or more people can own the property together. The LLC will dictate the ownership percentage of each partner. The ownership percentage will determine the appropriate split of the profits. The LLC will pay for repairs and maintenance. This will reduce disagreements among the partners and ensure that no one is investing or receiving more than their fair share of money. 

Remain Anonymous

For landlords who value their privacy, putting rental property in an LLC can help them to remain anonymous to a degree. If the LLC is not incorporated, it will not take a lot of investigation for someone to link the LLC to the owner(s). However, if someone is doing a simple property record search and the rental property is in an LLC, the property record will show the name of the LLC, rather than the landlord's name.

Cons of Putting Rental Property in an LLC

While there are a number of pros to putting rental property in an LLC, there are also some cons. Understanding the possible drawbacks of putting rental property in an LLC is important to ensuring that the landlord makes the right choice for their needs. 

Additional Paperwork

Forming an LLC requires paperwork to set it up. The LLC must also have any required licenses or permits that may be required by the state or the city or parish in which the LLC is located. A registered agent must be appointed and a registered office in Louisiana must be maintained. After that, there are annual reports that must be filed, articles of organization and operating agreements must be created and regularly updated if needed. While it is not an extensive amount of paperwork, it is additional documentation that must be handled properly and promptly. 

Setup and Maintenance Fees

The Louisiana Secretary of State lists the various fees associated with starting and maintaining an LLC. Filing articles of organization is $100. There is a $25 fee to reserve an LLC name, and another fee of $25 each to transfer a reserved name or cancel a reserved name. Amended certified copies are $25 and additional certificates are $20. Annual reports are $30 to file. If the LLC needs to change its registered agent or amend the members, those changes are $25 each. Licenses and permits that may be required will vary based on the city or parish that issues them and the industry the business is in. Like the paperwork, these fees may not be exorbitant, but they are additional expenses that landlords should consider when making a decision about putting rental property in an LLC. 

Income and Franchise Taxes

While some LLCs are exempt from federal income tax, the state of Louisiana does have state income and franchise taxes. The Louisiana Department of Revenue indicates that for both state income and franchise taxes, it takes its lead from the IRS and treats LLCs the way they are treated for federal income taxes. This means if the LLC does not pay federal income tax, it will not pay income or franchise taxes. For those LLCs that do pay federal income tax, they will need to consider the additional state income and franchise taxes that will be required. 

Financing Difficulties

Another drawback to putting rental property in an LLC is that landlords may struggle to find financing. This may vary depending on the lender and whether the rental property is commercial or residential. Many residential lenders are hesitant to extend a mortgage to an LLC because of the liability limitations the LLC offers. 

For rental properties on which the landlord already holds a mortgage, there may be a due-on-sale clause. Putting rental property in an LLC if it has a due-on-sale clause in the mortgage documents may trigger that clause and the lender will demand the balance of the mortgage be paid immediately. If the borrower will remain the owner through the LLC, they may be able to ask their lender to waive the due-on-sale clause but there are no guarantees that the lender will agree. 

How a Louisiana Real Estate Attorney May Be Able to Assist You

Owning rental property can be a full-time business or a nice way to make an extra income in addition to your regular business or job. Deciding whether to own the property in your own name or place it in an LLC can be difficult. There are pros and cons to putting rental property in an LLC. If you are struggling with this decision, an experienced real estate attorney with Business Law Group may be able to review your circumstances and offer advice about which option may be right for you. Call (504) 446-6506 to schedule a consultation in our New Orleans office and learn more about owning Louisiana rental property.