If you own rental property, you may have asked yourself, “Should I put my rental property in an LLC?” That’s a good question.
If you rent out a property, you can preserve your personal assets and get certain tax benefits by forming an LLC (Limited Liability Company). It is worth the time and effort for Illinois landlords and real estate investors to set this up correctly.
We’ll show you step by step how to form an LLC for rental property in this article. We’ll also talk about the tax benefits of an LLC for rental property and why many landlords utilize an LLC for investment property. When you’re done reading this, you’ll know exactly what to do and what not to do.
Putting a rental home in an LLC is like giving your property its own safety vest. If a tenant gets harmed on your property by accident or if a disagreement leads to a lawsuit, an LLC implies that your house and savings are usually safe. Because an LLC is a separate legal organization, creditors and claimants can usually only go after the LLC’s assets, which include the property and bank accounts held by the LLC, not your own automobile or home. Landlords often set one up because it protects them from being held liable.
An LLC won’t protect you from everything in real life. You can’t use it to avoid paying taxes, and if you personally guarantee a loan or do something unlawful, you’re still responsible. But for regular rental hazards, such as tenant litigation or debts tied to the property, an LLC really separates your rental business from your personal life. It also makes your rental business look more professional, which makes banks and partners more likely to take it seriously.
Benefits of an LLC for Rental Properties
A rental LLC protects you in more ways than one. One huge benefit is that it makes taxes easier. An LLC is a “pass-through” business by default. That means the LLC doesn’t have to pay federal income tax; instead, all of the rental income and losses go to your personal tax return. You record the rent, costs, depreciation, and other things on your Schedule E, exactly like you would if you owned it. The distinction is that there is no corporate tax layer, so you don’t have to worry about firms being taxed twice.
This pass-through structure really saves money. You can, for instance, subtract all of the normal costs of renting, such as mortgage interest, property taxes, repairs, insurance, depreciation, and so on, from that rental revenue. In reality, everything from a new roof to the fees you pay for property management might lower the rent you get. The Qualified Business Income (QBI) deduction is one benefit that not many people know about. Under IRS guidelines, some rental property owners can deduct up to 20% of their net rental income on their personal return. Overall, the tax benefits of an LLC for rental property usually mean that landlords pay less in taxes and have easier bookkeeping.
Another useful benefit is keeping track of your money. If you have an LLC, you need to have a separate credit card and bank account for the rental. This split makes keeping track of your spending straightforward because you’ll always know which ones are for business. It also keeps personal and rental money separate, which is vital for keeping the law on your side.
An LLC is flexible in addition to being responsible for taxes and debts. You can choose how to run the LLC (you can do it yourself or hire someone else to do it) and how to divide the revenues among the members. If you own more than one rental property, you can even set up many LLCs. One way to do this is to give each property its own LLC so that problems with one property don’t affect the others. This “series” method adds a layer of protection because each LLC is its own business.
An LLC is a good way to keep your personal and rental lives separate. It stops one thing (your rental business) from ruining everything else you possess. The LLC structure can also make it easier to transfer ownership of your rental property or organize your estate if you decide to sell it or give it to someone else.
How to Set Up an LLC for Your Rental Property in Illinois
Here’s how to do it in Illinois:
- Pick a name for your LLC. Choose a name that is different and follows Illinois standards. It must have “Limited Liability Company” or an abbreviation like “LLC” or “L.L.C.” in it, and it can’t be too similar to the name of another business. You may quickly check to see if your name is available on the Illinois Secretary of State website.
- File Articles of Organization. This is the most important step in the formation process. You will send the Illinois Secretary of State your Articles of Organization, either online or by mail. The Articles include basic information like the name and address of your LLC and the name of your registered agent. The state will legally recognize your LLC after it is approved. In Illinois, filing costs $150 right now.
- Choose a Registered Agent. Every LLC in Illinois must have a registered agent who lives in Illinois. The LLC’s registered agent gets official mail and legal papers for the company. If you live in Illinois, you can be your own agent or employ someone else. (Using a service can cost between $100 and $300 a year.)
- Write an Operating Agreement. You don’t have to file one in Illinois, but it’s a good idea to do so. An operating agreement is a contract between the members of an LLC that specifies out who owns what, who runs the LLC, and how profits and losses are shared. It’s the guide you need to run the LLC. This paper also shows banks and judges that your LLC is real.
- Get an EIN, which stands for “Employer Identification Number.” Most LLCs need an EIN. In a way, it’s like your company’s Social Security number. You will use it to register a business bank account, pay taxes, and hire workers (if you ever do). You may apply for free on the IRS website. It’s quick and easy. It’s usually safer and more professional to use an EIN instead of your SSN, even if you’re the only member of your LLC and don’t have any workers.
- (Optional) Sign up for state taxes or permits. You shouldn’t have to pay sales tax on most rental-only LLCs in Illinois, but you should check the rules in your area. You might need to register with the Illinois Department of Revenue if you ever hire people or offer services. Also, see if your city (like Chicago) requires you to get a rental license or register your property.
- Keep your LLC in good standing. After you form, keep up with the requirements. An LLC in Illinois has to file an Annual Report every year, which costs $75 right now. The report lets the state know if your address or registered agent has changed. If you miss this date, you could face penalties or even the end of the LLC. Put it on your calendar!
The good news is that it’s not too hard. If you’re comfortable with paperwork, you can complete most of this online without a lawyer. (Most landlords do it themselves to save a lot of money on legal fees.) You can always call the Illinois Secretary of State, a business creation service, or a lawyer if you get stuck.
Costs and Timing in Illinois
In Illinois, LLC fees are pretty straightforward. Here’s what to expect:
- Filing Fee: $150 to file the Articles of Organization. That’s the main one-time cost to start the LLC.
- Expedited Service: Illinois offers next-day processing for an extra $100 (if you’re in a rush).
- Registered Agent: $0 if you act as your own agent, or roughly $100–$300 per year if you hire a commercial agent.
- Operating Agreement: DIY is free (lots of templates exist). Hiring a lawyer to draft it might run a few hundred dollars, but it’s optional.
- EIN: Free from the IRS.
- Annual Report: $75 each year.
So at first, you’ll spend roughly $150, plus any extra money you want to spend on quick or professional support. Compared to many other states, that’s a good price, and it’s about the same as the national average. Don’t forget about the recurring expenditures. The yearly report costs $75 a year, and if you hire an agent, it could cost you another $100 or more.
In terms of timing, Illinois is rather quick. If you file online and don’t pay extra, the state normally processes your LLC in 5 to 10 business days. It can take 2 to 3 weeks by mail. If you pay an extra $100, you can get authorized in 24 hours. Before you start renting or need to close on a home, be sure you have everything in order.
Build It Right with 23 Legal Today!
If you’re considering starting an LLC or want to make sure your present structure is working the way it should, it’s a good idea to receive advice from someone you trust. Get in touch with Ben Weaver. 23 Legal provides legal services for real estate and estate planning to people, families, community groups, and small company owners all throughout the Chicago area. A quick chat today can help you avoid making mistakes that will cost you a lot of money later on. It can also make you feel better as you build your rental portfolio.
FAQs
Yes, for a lot of landlords. An LLC keeps your personal property distinct from your rental debts. It won’t stop everything (you still need landlord insurance!), but it’s a solid layer of protection. It also makes taxes and bookkeeping easier. Many experts even say that if you own more than one rental, you should set up a separate LLC for each one to protect it from the others. You might not need it if you only have one house and a very little risk, but most serious investors think it’s worth it for the peace of mind.
Do what the steps above tell you to do. In Illinois, that entails picking a distinctive name for your LLC (with “LLC” in it), filing Articles of Organization ($150), choosing a registered agent, making an operating agreement, and receiving an EIN. You may do much of this online or by filling out state forms. Your LLC is official as soon as the state approves your Articles, which normally happens within a week. You can then transfer the title of the property to it.
The big tax benefit is pass-through taxation. You don’t have to pay income tax on the LLC itself; instead, you record the LLC’s profits or losses on your own return. This keeps you from having to pay taxes twice. You can still deduct all of your typical rental charges, like interest, taxes, upkeep, depreciation, and so on, as LLC business expenses. A rental LLC may also be able to get the 20% qualified business income deduction (QBI) in specific instances. In general, the tax treatment for an LLC is quite similar to that of owning rental property on your own, except that it is done through the company’s EIN and books.
The first filing costs $150. Every year, the yearly report costs $75. If you hurry the file, you might have to pay an extra $100. You should plan to spend between $100 and $300 a year on a registered agent service. Other than that, the costs are very low. Many landlords do it themselves and merely pay state costs, so the total cost to start up can be as low as $150 (plus small continuing expenses). Most people think it’s extremely fair given the liability protection they get.
An LLC doesn’t give you any special tax savings that a landlord doesn’t already get, but it can give you more choices. Some LLC owners choose to be taxed as an S-corporation in some cases to save on self-employment taxes (although this is not common for rental revenue alone). The LLC also makes it easy for you to claim all of your rental deductions without any trouble. You will still have to pay income tax on your net rental profits, but an LLC makes your arrangement as tax-efficient and simple as feasible.
You can definitely form an LLC by yourself. The forms are available from the Illinois Secretary of State, and a lot of people go through the process without a lawyer. That being said, if you’re not sure how to write an operating agreement or if your ownership structure is convoluted, it could be a good idea to talk to a lawyer or tax professional. A basic operating agreement template and an online EIN application are all you need in a lot of circumstances.
Why Choose 23 Legal
23 Legal offers Real Estate and Estate Planning legal services to individuals, families, community associations and small business owners throughout Chicagoland. We know how intimidating “the law” can be. In fact, when most people think of law offices, they think of stuffy leather chairs, huge wooden desks and pompous lawyers who charge outrageous fees. That’s not us! We believe in 1-to-1; the same lawyer should work with you all the way through. Whether you have an estate planning issue, family trust concern, or you have a legal problem in regard to a new home, business, real estate or remodel, you need a lawyer who cares. That’s where Ben comes in! We are great listeners; more than that, we are lawyers who believe that our clients always come first.
