A limited liability company ("LLC") is a flexible legal entity that can be formed to own or operate a business. Though both LLCs and corporations provide limited liability, LLCs are cheaper and easier to form and manage.
What are the benefits to putting your investment property in an LLC?
Hence the term "limited liability company," this ownership structure limits your liability. If your property is in an LLC, and you are sued in relation to your property ownership, your liability is limited to the assets of the LLC (your rental property). Your personal assets are protected in the case of a loss or a lawsuit. For example, if a tenant or a tenant's invitee is seriously injured on your property and subsequently sues for damages, the tenant's damages would be limited to the value of your rental property. The tenant could not pursue an award of damages from your personal finances or primary residence. Additionally, if you were renovating your investment property and due to unexpected or extreme hardship you could not afford to pay your contractor, the contractor would only be able to sue the LLC. Your personal assets would be protected.
As illustrated in the previous examples, it is best to keep multiple investment properties in separate LLCs. This way, a person suing your LLC on one investment property would not be able to touch the assets of a property in a different LLC. In this respect, keeping investment properties in separate LLCs further insulates you from liability.
By placing your investment property in an LLC, you will also reap the tax benefit of pass-through taxation. With an LLC, the income from the rental property "passes through" to your personal income as reflected on your personal income tax return. This in turn minimizes the amount of taxes withdrawn from your income for taxes. (Contrast an LLC's pass-through taxation with that of a corporation, in which the entity is taxed on its profits and then owners of the corporation are taxed again when they take income from the business.)
What are the steps to putting my property in an LLC in New York?
Consult your mortgage lender to find out if they will allow you to transfer title to an LLC, and if there are any implications for doing so. Some lenders may charge additional fees or a higher interest rate.
Check the Business Entity Database to see if the proposed name for an LLC is available in New York State. A good tip would be to use the property address as an LLC name (for example, 123 Main Street LLC) for a decent chance at name availability and as an easy way to remember your LLC names for separate investment properties. Check the database here: https://appext20.dos.ny.gov/corp_public/corpsearch.entity_search_entry
File Articles of Organization with New York State and pay a filing fee of $200. This step can be done online and typically takes 24-48 hours for approval. The process may be expedited for an additional fee.
Have an attorney prepare a deed for your rental property placing the property in an LLC, and record the deed with the county. Recording fees will typically cost about $200.
Publish information regarding your formation of the LLC in two newspapers, one that runs daily and one that runs weekly, for six weeks. The county will typically have a published list of acceptable publications from which to choose. Typically each six-week publication costs between $50-100.
At the end of the six-week publication, file a Certificate of Publication with the State along with a filing fee of $50.
Obtain an Employer Identification Number ("EIN") for your LLC from the IRS. This should be free; be aware that there are many scam websites that may look like the IRS website that attempt to charge filers fees of $250+ to file the EIN. Never pay to obtain an EIN.
Obtain a separate bank account for the LLC. This will allow you to better track business expenses for tax purposes.
If your LLC has two or more members, you must create an operating agreement detailing the operations, agreements and management structure of the LLC.
Be advised that New York charges an annual filing fee for the LLC, depending on the gross income of the LLC.
If you are considering placing your investment property in an LLC, call Baer Law Partners PLLC for assistance - (518) 577-2290.
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