Should I form an LLC to help protect my rental properties?
A Limited Liability Company (LLC) combines the pass-through taxation of a sole proprietorship, or general partnership, with the limited liability of a corporation.
An LLC operates as a separate legal entity, but without being a corporation. Therefore, there are no federal corporate taxes imposed on the LLC as a separate entity. To start an LLC, a member or members must file the specific forms with a state's Secretary of State. Required information includes the latest date at which the LLC is to dissolve, and a statement explaining whether the LLC will be managed by one manager, several managers, or the members.
The LLC is unique in that it's formed by members, not shareholders, who draw up an operating agreement to run the business without the structural guidelines imposed on a corporation.; This allows for greater flexibility without the formalities, such as Board of Director meetings, which are imposed on a corporation. While most LLCs have two or more members, in many states, a single member can now form an LLC as a legitimate business structure.
Advantages of a Limited Liability Company:
1. Personal liability protection for members;
2. No need to meet the requirements and formalities of a corporation to maintain the business status;
3. Members can draw up their own contract, allowing for flexibility in management and responsibilities;
4. Greater flexibility than for a corporation in allocating income to members.
For example, an LLC can have various classes of interest, while an S Corporation can issue only one type of stock.