You bought a property and want to use it as a vacation/short-term Airbnb rental. Time to get started with the process. I will show you why this article is called “Best How to Create an LLC for Airbnb Rentals”. You need to transfer any and all investment properties into legal entities called Limited Liability Companies or LLCs. The LLC will help protect your assets. When you sell your LLC, the rental history stays with the property manager for the next owner (see below).
A sole proprietorship (when you own the property in your name) will not protect your personal property if a guest sues for more than the insurance coverage. They can come after your personal assets. This is the reason why the limited liability company law was conceived. All legal action stops at the assets in the LLC.
Avoid Subchapter S and C Corp elections
You can also elect to create an S corporation or a C corporation rather than an LLC but there are complications with taxes and reporting requirements in some states with these types of organizations including double taxation. It’s not a good solution for Airbnb/vacation rentals. These other forms of ownership are not designed to protect your personal assets.
I have been recommending for many years that real estate investors take all actions necessary to protect personal income and assets. The LLC structure is a good step in the right direction to protect your rentals. Creating an LLC for your rental is basically creating a business structure. Turning your investment into a business that can generate rental income. As an Airbnb property or even when you rent it directly, your new business will help you build wealth and the LLC will help you keep it.
Should I open an LLC for each property?
YES and Yes, each property always. If more than one is in a property a single llc it is open to the same damages as the property involved in the court action.
Setting up your business the right way by registering with your state and obtaining an LLC certificate is the first step. Most states require you to obtain the services of a registered agent if your primary residence is not in the state. You should create the LLC at the start in the state where the property is located.
There are many reasons for this including the ability to use the court system in the state where the property is located. Don’t worry about the cost to register with the State, it is what it is. Don’t jump to another state because it seems to be cheaper.
Consider a revocable living trust to own the LLC
FYI, you can create an LLC in your home state that owns the LLC in the state where the short-term rental or long-term rentals are located. Some people create a revocable living trust in their home state and make it the owner of the Airbnb rental LLC formed in another state. This does not change tax issues, for some, it’s about estate planning. Stacked LLCs don’t have an impact on your legal protection.
Comparison of Sole Proprietorship vs Limited Liability Company
| Potential Issue | Sole Proprietorship | Limited Liability Company |
|---|---|---|
| Personal liability for debts and damages | Yes | No |
| Difficulty raising capital | Yes | Easier to raise capital |
| Tax implications | More complex | Less complex |
| Management flexibility | More flexible | Less flexible |
| Continuity of business | Less continuous | More continuous |
| Cost to set up | Lower | Higher |
Obtain any business license that is also required by local or state agencies. Some Cities require necessary permits for short-term rental property and you should obtain permits through your rental LLC. The same communities that require permits will often require filing fees. LLC rentals should always obtain permits in the name of the business.
Local laws are often focused on small business owners who operate short-term rentals in their communities. You must pay careful attention to these rules, fines can be heavy.
Rental property owners (or their LLCs), will file income taxes but the income will flow through to their personal tax returns. There are important tax advantages to owning your own business.
Many expenses are deductible
Not only are property taxes on the investment property deductible but many other expenses are as well including your travel to the property. Taxable income is managed through your personal tax return which is subject to all deductions and exemptions offered to you.
Specifically, your CPA will complete an IRS form 1120. This form tells the IRS what activities have taken place and income-less expenses to be passed on. If you have an LLC partnership (multi-member), a form K1 will be completed for each member dividing up the assets, income, and expenses based on your ownership agreement.
Form 1120 is sent to the IRS as information only. The form K1 will be attached to your 1040 form and the income or loss will be entered into the 1040 form. This is a simple process. Basically, all of the details are listed in form 1120 including line by line for expenses e.g. mortgage, insurance, travel, etc. What drops to the bottom line after some math is transferred to your 1040 form?
Passive income treatment is the most common
Keep in mind that this is passive income and unless you are a full-time investor or real estate agent, you are permitted to deduct just a portion of losses. What is not deducted currently is rolled forward and can be adjusted in the future when the property is sold.
How do I get started?
To form your new business it’s a good idea to create a name that you can search on the Secretary of State website. Go to the area to start a new business. Select LLC and if they ask, single or multi-member. If the name is available, that’s the start. Some states may require you to upload your Articles of Organization.
See our Video at the end about this process
You can form your business online at the Secretary of State’s office and pay the fee online. There are many third-party sites that offer to do this for a fee, it’s not necessary, and the process is very simple. Be prepared with a credit card to pay the fee. If you want to use the Secretary of State website be sure you are not selecting one of the companies pretending to be the state website.
Simply follow the prompts and enter the information where required. You should be able to print your certificate at the end of the session. At some point, you may be requested to provide a “Certificate of Good Standing”. You can usually obtain this at the website. It simply says that on this date your company is properly registered to do business in your state.
The following is a list of fees that states charge (as of this writing):
| State | Fee to Create | Annual Tax |
|---|---|---|
| Alabama | $100 | $50 |
| Alaska | $100 | $50 |
| Arizona | $50 | $50 |
| Arkansas | $40 | $50 |
| California | $70 (free until June 30, 2023) | $800 |
| Colorado | $50 | $50 |
| Connecticut | $125 | $35 |
| Delaware | $99 | $300 |
| Florida | $125 | $138 |
| Georgia | $100 | $50 |
| Hawaii | $50 | $50 |
| Idaho | $50 | $50 |
| Illinois | $50 | $50 |
| Indiana | $50 | $50 |
| Iowa | $50 | $50 |
| Kansas | $100 | $100 |
| Kentucky | $50 | $50 |
| Louisiana | $75 | $50 |
| Maine | $100 | $100 |
| Maryland | $50 | $50 |
| Massachusetts | $50 | $50 |
| Michigan | $50 | $50 |
| Minnesota | $135 | $135 |
| Mississippi | $50 | $50 |
| Missouri | $50 | $50 |
| Montana | $70 | $70 |
| Nebraska | $50 | $50 |
| Nevada | $75 | $75 |
| New Hampshire | $100 | $100 |
| New Jersey | $125 | $125 |
| New Mexico | $50 | $50 |
| New York | $125 | $225 |
| North Carolina | $125 | $125 |
| North Dakota | $50 | $50 |
| Ohio | $50 | $50 |
| Oklahoma | $100 | $100 |
| Oregon | $50 | $50 |
| Pennsylvania | $125 | $250 |
| Rhode Island | $50 | $50 |
| South Carolina | $50 | $50 |
| South Dakota | $100 | $100 |
| Tennessee | $50 | $50 |
| Texas | $300 | $300 |
| Utah | $50 | $50 |
| Vermont | $100 | $100 |
| Virginia | $50 | $50 |
| Washington | $100 | $100 |
| West Virginia | $60 | $60 |
| Wisconsin | $50 | $50 |
| Wyoming | $50 | $50 |
You need to create the articles of organization.
This is a document that tells everyone about your business, who owns what, and all of the rules and exceptions for the organization. Check online, there are many provider sites that allow you to enter data into their site and then the document pops out.
This is your document, there is no specific format for it. There is however a suggested list of topics that should be in a well-written document to protect everyone. The following are the minimum topics that should be included in your Articles of Organization.
- Name of the LLC: The name of the LLC must be unique and distinguishable from the names of other businesses in the state.
- Purpose of the LLC: The purpose of the LLC should be described in general terms. For example, the purpose of the LLC could be to “engage in any lawful business for profit.”
- Principal office address of the LLC: The principal office address is the location where the LLC will be headquartered.
- Name and address of the registered agent for the LLC: The registered agent is a person or business entity who is responsible for receiving legal notices on behalf of the LLC.
- Names and addresses of the initial members of the LLC: The initial members are the people who will own the LLC when it is first formed.
- Management structure of the LLC: The management structure of the LLC determines how the LLC will be managed. There are two main types of management structures: member-managed and manager-managed. In a member-managed LLC, all of the members have equal management rights. In a manager-managed LLC, a subset of the members are appointed as managers and have the authority to manage the LLC.
- Distribution of profits and losses among the members of the LLC: The distribution of profits and losses among the members of the LLC is determined by the articles of organization. The articles of organization can specify how profits and losses will be allocated among the members, or they can leave it up to the members to decide.
- Amendments to the Articles of Organization: The Articles of Organization can be amended by the members of the LLC. However, there are usually some restrictions on how the articles of organization can be amended. For example, the articles of organization may require the unanimous consent of all of the members to amend certain provisions.
- Dissolution of the LLC: The LLC can be dissolved by the members of the LLC. The articles of organization may specify how the LLC can be dissolved, or they may leave it up to the members to decide.
You will need an “Addendum A” that will list the rental property owned by the LLC. You also need a tax matters partner named along with a clear statement about who is and is not permitted to sign for the business and under what circumstances. The bank will require a statement in the document permitting the individuals who are starting the business accounts to do so.
Sample Operating Agreement
This Operating Agreement of [name of LLC] is made and entered into as of [date] by and among the following persons who are hereafter referred to as the “Members”:
[List of members]
In consideration of the mutual covenants and agreements contained herein, the parties agree as follows:
- Name. The name of the LLC shall be [name of LLC].
- Purpose. The purpose of the LLC is to engage in any lawful business activity for which an LLC may be formed under the laws of the State of [state].
- Capital Contributions. The Members agree to contribute the following capital to the LLC:
[List of capital contributions]
- Management. The LLC shall be managed by the Members. Any decision made by a majority of the Members shall be binding on the LLC.
- Profits and Losses. The profits and losses of the LLC shall be allocated among the Members in the following manner:
[Profit and loss allocation]
- Admission of New Members. New Members may be admitted to the LLC by the unanimous consent of the existing Members.
- Removal of Members. A Member may be removed from the LLC by the unanimous consent of the remaining Members.
- Dissolution. The LLC may be dissolved by the unanimous consent of the Members.
- Governing Law. This Operating Agreement shall be governed by and construed in accordance with the laws of the State of [state].
- Entire Agreement. This Operating Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior or contemporaneous communications, representations, or agreements, whether oral or written.
- Severability. If any provision of this Operating Agreement is held to be invalid or unenforceable, such provision shall be struck from this Operating Agreement and the remaining provisions shall remain in full force and effect.
- Waiver. No waiver of any provision of this Operating Agreement shall be effective unless in writing and signed by all of the parties to this Operating Agreement.
- Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, upon the first business day following deposit in the United States mail, postage prepaid, certified or registered, return receipt requested, addressed as follows:
If to [name of Member]: [Name of Member] [Address]
If to [name of Member]: [Name of Member] [Address]
or to such other address as any party may designate in writing from time to time.
- Headings. The headings in this Operating Agreement are for convenience only and shall not affect its interpretation.
- Counterparts. This Operating Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Operating Agreement as of the date first written above.
[Signature] [Name of Member]
[Signature] [Name of Member]
This is just a sample operating agreement, and you may need to modify it to fit the specific needs of your LLC. You should consult with an attorney to ensure that your operating agreement is properly drafted and that it meets your specific requirements.
Employer Identification Number (EIN)
After you have your name and Articles of organization, it’s time to obtain an employer identification number. Go to IRS.com and follow their links to obtain an EIN, a federal employer identification number. You will be offered the opportunity to download the EIN letter from the IRS website or have them mail it to you. Always select download. Be sure you save it while you are still online. If you ask for a mail version, you may wait a month to get it if ever.
There are single-member LLCs and multi-member LLCs. SS-4 form wants to know in block 8a if you are an LLC, yes or no. By default, you will be a single-member LLC unless you enter a number of members in block 8b. You will also be asked if you want to be taxed as a partnership. Technically an LLC is a partnership. This will allow for a pass-through of income to your personal tax return. Be sure you do the correct thing here or you will fight with the IRS for months trying to correct it.
Avoid the Subchapter S and the C corporation neither are suitable for your purposes unless you intend to grow large and offer stock. At that point, you can make a conversion if you so choose. Almost all vacation rentals are formed as an LLC.
The Bank Account
The next step is to open a business bank account. It’s very important that you have a separate bank account from your personal account. The bank will require copies of your state registration, the IRS letter with your FEIN, and perhaps a copy of your articles of organization.
Banks require forms to be completed and if there is more than one member that owns over 25% of the business that person must sign on the form to open the account.
Opening the checking account can take some time. Be sure you have everything you need or you will have to interrupt the process and return. All partners should be there to sign. You will be asked who will be the signers on the account. You can decide on one or more. You can even decide if you want two people signing every check. Some of this can be spelled out in the Articles of Organization.
Create an addendum to the LLC agreement
You will probably be asked to provide an addendum that specifically permits the members to open an account at the selected bank. Create one before you go just in case. This can be minutes of a membership meeting or Addendum “B”.
At this point, you will have a legal business entity. So treat it as such. You have created a formal structure with Articles of Organization. If you decide to buy additional Airbnb properties in the future, create a separate legal entity for each property. Do not put all of your rentals into the same LLC. Create an LLC for each LLC. Your trust or higher level LLC can own the new LLC.
Don’t forget your insurance agent.
You need to have the correct type of commercial insurance on your vacation homes. An insurance company can provide coverage for your second home or short-term rental properties. Some people buy ordinary household coverage and do not tell the insurance company that they are operating a short-term rental business. If there is a claim, the company may not cover it unless they know in advance it is an Airbnb business.
Accounting and Tax Preparation
Let’s start by separating the two. You need to locate a good CPA, not an accountant. CPAs know how to manage business tax returns. There are some good enrolled accountants who specialize with the IRS and these are good as well. CPAs should be used for tax return preparation and advice.
You need to start with a simple accounting system. There are many you can buy but I recommend that you start simply by using an online company that is free of charge. That’s right, no strings, zero cost. Waveapps.com
Very Important – Work with a property manager
Why work with a property manager? One day you will want to sell your property. When that happens, there will be value built in with all of those bookings. The best part of working with a property manager is that they and now you are the hosts. When you sell your property, you sell your rental LLC that contains the property.
The new owners will have an existing agreement with the property managers to continue offering the same property on third-party websites. If that property had a 5 rating, you start immediately with a 5 rating. Airbnb does not know you nor do they know the new owner.
Should you decide to manage your own property as a host when you sell the property the new owners will have to create a new account and all of that goodwill and those great ratings will vanish. Here are some other great reasons to use a property manager:
- Peace of mind: When you use a property manager, you can rest assured that your property is in good hands. They will handle all aspects of the rental, from guest inquiries and bookings to cleaning and maintenance. This frees you up to relax and enjoy your life, knowing that your property is being taken care of.
- Increased income: A good property manager can help you increase your rental LLC income by maximizing occupancy rates and setting competitive prices. They can also help you attract higher-paying guests by providing a high-quality experience.
- Reduced stress: Managing an Airbnb rental can be a lot of work, especially if you don’t have the time or expertise to do it yourself. A property manager can take care of all the nitty-gritty details, so you can focus on other things.
- Improved guest experience: A professional property manager will have experience with Airbnb and will know how to provide a great guest experience. They will make sure your property is clean and well-stocked, and they will be available to answer guest questions and resolve any issues that may arise.
- Reduced liability: When you use a property manager, you are essentially outsourcing your liability. This means that they are responsible for any damages or injuries that occur on your property while it is being rented out.
- Access to resources: A good property manager will have access to a network of vendors and suppliers that can help you with everything from cleaning and maintenance to marketing and advertising. This can save you time and money.
- Expert advice: A property manager can provide you with expert advice on a variety of topics, including pricing, marketing, and guest relations. This can help you make informed decisions that will benefit your business.
- Hands-free management: If you want a completely hands-off approach to managing your Airbnb rental, a property manager can provide that for you. They will handle everything from start to finish, so you can focus on other things.
- Flexibility: If you need to travel or are unable to manage your Airbnb rental for any reason, a property manager can step in and take over. This gives you the flexibility to do what you need to do, without having to worry about your rental.
- Time savings: Managing an Airbnb rental can take up a lot of time, especially if you are doing it all yourself. A property manager can save you time by handling all of the day-to-day tasks, such as booking guests, cleaning the property, and responding to inquiries.
- Expertise: A property manager has the expertise and experience to manage an Airbnb rental effectively. They know the best practices for pricing, marketing, and guest relations. They can also help you avoid costly mistakes.
- Continuity: Sell your rental LLC to a new owner and the new owner gets the benefits of all of the guest comments from the past.
Please understand, that many people who buy a property for rent on the vacation market tend to use it as a toy. That is, they want to run the calendar and do most other things. That’s usually a mistake. Before you buy the property, factor in the cost of property management. If it works, buy it and move forward. If not, look for another property.
Disclaimer: KEYLADDER has no financial connection with Airbnb or VRBO. Mention their policies in this article only to send you to their website and verify current rules.
The Deed
Don’t forget to move your rental property into the LLC. This is a process that we have written about in another blog article.
Education
The more you know about investing the more successful you will become. You can get there overtime or rush to it all at once. KEYLADDER offers several courses on investing in residential rental property. Two of the courses are free. If you find them helpful, you can enroll in one of the full courses and become an expert in a short time.
Time is money. Either you learn now or spend money learning and making mistakes until you become experienced years later. Please click the button below to visit our courses.
