An accidental landlord is someone who finds themselves with a real estate property that is either already rented out or needs to be filled with tenants. This often happens when someone inherits property or goes through a divorce.
Along with the other newfound responsibilities of being a new landlord, should you consider opening an LLC for your rental property?
Many Phoenix landlords, both new and experienced, choose to open an LLC for their rental properties to protect their business and personal assets. However, it isn’t necessarily required by law to have an LLC for rental properties in Arizona.
Do Landlords Need an LLC in Phoenix, Arizona?
There is no law requiring landlords in Phoenix to have an LLC. You may own a rental property without forming a business entity.
However, many experienced property investors do recommend forming an LLC to protect your assets and separate your personal life and assets from your newly-acquired rental property business.
What Does LLC Stand For?
An LLC is a limited liability company that may be formed with one or many members. It is a business structure that allows people to separate their personal assets and finances from their business assets and finances.
Forming an LLC is fairly straightforward but varies from state to state. It does require a bit of paperwork, but you can form one in just a few weeks.
Benefits of Having an LLC as a Phoenix Landlord
There are many benefits, both financially and personally, that come with having an LLC as a rental property owner in Phoenix, Arizona.
1. Protect Personal Assets
When you form an LLC, you are protecting your personal assets from liability. The only assets someone could come after are what your LLC owns. In this case, it would be your rental property business.
An LLC protects your assets as follows: As a new landlord, you accidentally break a Fair Housing law and a potential tenant decides to sue you. They cannot sue you for your own residential home, your car, or your personal finances. They can only go after what your LLC owns because the LLC owns the rental property, not you personally.
This is excellent protection and offers peace of mind to accidental landlords in case this kind of situation arises.
Other times an LLC for your rental property can protect you:
- Landlord-tenant law violations
- Unlawful entry without notice
- Wrongful eviction
- Disputes over a security deposit
2. Keep Track of Management Expenses
As a new landlord, you may not feel prepared to “run a business” owning and managing your rental property. It can be easy to get your personal and business finances mixed up when you do not have an LLC.
However, forming an LLC as a landlord makes keeping your business expenses separate from personal expenses much easier. When you have an LLC, you will create a business bank account. In this account, you will deposit your rental income and use it to pay for expenses such as utilities, taxes, maintenance, and property management fees.
Having all of these expenses condensed to one specified bank account makes filing taxes so much easier at the end of the year for landlords.
3. Pass-Through Tax System
While we’re on the topic of taxes, forming an LLC for your Phoenix rental property acts as a pass-through tax for your personal income.
Companies and organizations are taxed on the profit they make at the end of the year. Since your LLC will pay you directly, you can minimize your annual personal income tax with this pass-through tax system.
4. An LLC for Each Rental Property
One person can own multiple LLCs for multiple properties. So, if you find that you enjoy receiving passive income through owning a rental property and would like to add properties to your portfolio, you can create an LLC for each new investment property.
Since each property is owned by a separate LLC, if something were to happen, the rest of your portfolio is protected from liability. Going back to our first example, if one LLC owns just one property, that is all it can be liable for as opposed to one LLC owning five properties.
5. Flexible Business Structure
Opening a business entity can be a bit intimidating, especially if you are in the position of being a new landlord in Phoenix. However, forming an LLC is one of the easiest, low-cost, and stress-free ways to open a business and protect your personal assets.
You can have a single-member LLC or multiple members involved. It’s also easy to transfer or sell shares if you decide to change the ownership structure.
How Much Does an LLC for Rental Properties Cost?
Filing for an LLC in Arizona costs under $100 and can be as low as $50. There are many services available that will help you with paperwork and create your LLC at an additional cost. Or, you can do it yourself.
To maintain the LLC, you may be required to hire a Commercial Statutory Agent, which will cost you around $125 per year.
Should Landlords Have an LLC for Rental Properties?
While there is no legal requirement for landlords and real estate investors to have an LLC, savvy rental property owners do create an individual business entity for each property they own.
After working hard to acquire and maintain personal and business assets, the last thing you want to do is lose your hard-earned personal residence or finances due to a lawsuit over your role as a self-managing landlord.
The number one benefit of an LLC is the protection of your personal assets. But, it also makes managing a rental property easier when it comes to expenses and filing taxes.
Guidance From An Experienced Phoenix Property Manager
Finding yourself as a new landlord comes with many responsibilities, more than just worrying about whether or not you should file for an LLC.
You also have to worry about screening prospective tenants, writing a lease, maintaining the property, managing tenants, handling security deposits, dealing with maintenance requests, performing move-out inspections, and following landlord-tenant laws.
Brewer & Stratton Property Management can take all of that off your hands. Our team of expert Phoenix property managers has served the area for over a decade, helping everyone from seasoned investors to brand-new Phoenix landlords by providing excellent property management services.
With over a thousand 4.5-star reviews on Google, we are a Phoenix property manager dedicated to creating a seamless experience for investment property owners in Arizona.
If you want to learn more about owning rental properties in Phoenix, check out Are Phoenix, AZ Rental Properties Recession-Proof in 2023? next.