If you own and manage rental properties, you may have heard about some of the possible benefits of forming a limited liability company (“LLC”) to run your operations. This may be a solution for some landlords, but what are the benefits of using an LLC for rental properties in Arizona?
Since every landlord will have a unique situation, the short answer is that an LLC may be beneficial to some. Regardless your situation, it is not going to be an easy decision to make. But with the right information at your fingertips, and the help of an experienced Arizona real estate attorney, you can arrive at the best conclusion.
The Goal of LLCs
Primarily, most people form an LLC to reduce liability. LLCs are statutorily-created entities that are designed to limit the personal liability exposure inherently found in a corporate structure, while still allowing the members of the LLC to take advantage of certain state and federal tax benefits.
In other words, it is best to view these types of entities as liability shields that help protect your personal assets from a potential civil judgment. This means that even if your company, the LLC, gets sued and a judgment is entered against the LLC, your personal income and assets cannot be sought in order to collect on that judgment, so long as it was only against the LLC.
Consider the following example of how an LLC for rental properties in Arizona can protect you from liability:
Let’s imagine that you have a tenant and they have a friend over that slips and falls, sustaining injury. A few weeks pass and the friend consults with an attorney and commences legal action based on a personal injury complaint.
As the owner of the property, you would likely be named in such a lawsuit, and you would have little-to-no choice but to hire an attorney in order to adequately protect your interest in court.
But in the case of having your properties owned and managed by an LLC, the liability would likely stop at your company, and not pass onto your personal assets or income. Notably, you would likely also have an insurance plan covering your LLCs’ assets for liability, but should that judgment exceed the scope of your coverage, your personal assets cannot be touched in order to fulfill the judgment against the LLC.
In this situation, while the LLC itself can be sued and may be liable for a judgment entered against it, you cannot be sued personally and your personal assets will almost always be safe, provided your company is properly formed and managed.
One of the only ways in which a person forming an LLC will remain liable is under an “alter ego” theory, by which a plaintiff suing the LLC can show that there is such a unity of interest and ownership that separate personalities of the corporation and the owners cease to exist. If the plaintiff is successful in “piercing the corporate veil” by showing this unity and a resulting injustice, Arizona law will disregard the LLC structure and permit a successful plaintiff to reach the individual and personal assets of the members to satisfy a judgment. For that reason, it is highly recommended that you consult with an experienced real estate attorney, who will be able to ensure that you have taken the proper steps to create and manage the LLC.
Tax Implications of an LLC
Another benefit of using an LLC for rental properties in Arizona is for tax purposes. LLCs have what is called “pass through taxation.” This means that the LLC is not responsible for taxes. Rather, the income that it generates passes to its members are taxed at the individual level as a “pass through.”
For example, if you’re the sole member of said LLC, you would file your taxes in a similar manner as you always have, making sure to add any forms and addendums that were generated by your LLC for member tax reporting information. In instances of multiple members, each would receive a tax form and the LLC would also file separate tax documentation for the IRS. Only a certified public accountant or tax attorney can provide you with qualified counsel on the best way to reduce your tax liability with an LLC. But as you can see, there are benefits to this model that are worth exploring.
Why You Need an Attorney
Setting up and managing an LLC properly is key. Poorly or mismanaged LLCs can result in exposure to individual liability to the owners. Take this into consideration when determining how you will go about setting up your company and conducting company business. How you manage the company bank accounts, income and dividends is important in ensuring that the liability shield remains intact and is something that no online service or form provider will tell you.
Along the way, you’ll also want to consider adding viable liability insurance to your LLC. A variety of different types of causality insurance plans are available for landlords and LLCs that protect your rental property from damage and acts of God, theft, fire, water and more; some even have clauses that reimburse you for lost rental income should something occur.
The attorneys at MacQueen & Gottlieb can provide counsel on real estate law and the benefits of using an LLC for rental properties in Arizona. Our firm has extensive experience with real estate law, contracts and LLC formation. Contact us today at 602-533-2840 to schedule an initial consultation or make an appointment online.