Investing in real estate is one of the best ways to make money, especially in Florida, as this state enjoys one of the highest population growth rates nationwide. Buying real estate in Florida is a good investment decision because of Florida’s economic stability, high returns on real estate investments, and yearlong high numbers of tourism. However, after deciding whether to invest in rental properties, it is important to make an informed decision regarding the kind of business entity your company should become. Generally speaking, a LLC is better for rental real estate properties than an S-Corporation.
What’s the Difference Between a LLC and a S-Corporation?
A LLC is a legal entity registered with the secretary of state, and as the name implies, this entity limits liabilities, keeping an owner’s personal assets safe from risk. Additionally, LLC owners can take advantage of pass-through taxation; this means that the LLC passes through all income and expenses to the LLC owner’s personal tax return.
On the other hand, a S-Corporation is simply a regular corporation that has elected a special tax status which permits the income of the corporation to be passed through to shareholders. While S-Corporations can be a great entity of choice for companies in the business of construction, flipping properties, professional practice, an owner of rental real estate would benefit more from having a LLC.
Why should you set up a LLC for Rental Properties?
Several issues might arise when dealing with a S-Corporation in the rental real estate world including limitations on issuing stock to shareholders and issues when transferring appreciated real estate. Creating a LLC for your rental property is a smart choice as a property owner. As mentioned above, a LLC has the advantage of reducing liability risk by effectively separating your assets from the company’s. The limited personal risk that LLC’s offer a real estate investor is a major benefit to this kind of entity. Having rental properties means having tenants; tenants that might throw parties or constantly invite people over which might get injured. In today’s legal climate, when someone gets injured the likelihood of that injured individual taking action is high. Owning the property personally would expose and put at risk a real estate investor’s personal asset whereas the “liability shield” of a LLC would insulate an investor against personal liability. Additionally, setting up several separate LLC’s for individual rental properties can insulate each property, thereby separating and protecting each property individually.
Additionally, the LLC entity offers the tax benefit of pass through taxation. While normally a corporation is taxed directly on its profits and owners are then taxed again when they make income from their business, in a LLC, all income made by the rental property will flow through to your individual tax return, minimizing the amount of money taken out of your income for taxes.