Published April 8, 2021. Updated October 12, 2023.
Hiring a property manager is one of the best ways to protect your Seattle rental properties—but it's not the only protection you need.
If a renter suffers an injury on your property, you could be liable. Without the right business incorporation for your investment properties, a lawsuit could impact your rental income and personal finances.
That's right. Your rental properties are a business! They need a legal business entity to protect them from liability claims and other legal issues. With the right incorporation, you can also reduce your personal tax liabilities while allowing access to more business tax benefits for your rental properties.
So, how can real estate investors know which entity is right for their properties? We've compiled some helpful info with the insights of our expert Seattle property managers!
Let's Talk About a Rental Property LLC
An LLC (Limited Liability Company) is one of the most common entities used for rental property incorporation. If you're considering your options, an LLC offers significant protection for real estate investors without many of the requirements that come with an S Corp or other entities.
How Does It Protect?
With your Seattle investment properties in an LLC, you have protection for your assets and rental income. Your private finances are also separated from your rental property business.
By contrast, when operating as a sole proprietor (without the protection of an LLC), income and assets remain commingled and at risk in the event of a lawsuit.
With an LLC for rental properties:
If a renter sues after suffering an injury, your personal finances are safe from a payout
Rental income is separate from your personal income, which can lower your overall tax bracket and reduce personal taxes
You experience more business tax benefits for your rental properties to reduce business tax amounts
Without an LLC or another business entity, losing a lawsuit can wipe out your rental property income and assets, as well as your personal finances. If an LLC doesn't seem quite right to avoid personal liability issues, some investors also consider incorporating your Seattle rental properties as an S Corp.
What About an S Corp?
An LLC is one of the simplest ways to incorporate. Investors can experience the benefits of this entity with one or several properties.
However, with more properties and larger investment businesses, setting up an S Corp could be a good option. With this business entity, investors have more rules and requirements to follow to comply with IRS guidelines, but it can be a better incorporation solution for large portfolios.
To qualify as an S Corp, real estate investors must:
Be headquartered in the U.S.
Have no more than 100 shareholders
Follow IRS rules for reporting and filing specific documents
This entity allows real estate investors to pass corporate income, losses, deductions, and credits through to shareholders for federal tax purposes. However, shareholders must file the appropriate paperwork each year to allow the S Corporation to avoid double taxation on rental property income.
If you plan to build a significant Seattle real estate portfolio with multiple shareholders, an S Corp can make more sense for your business. However, many investors prefer the simplicity of an LLC and the excellent protections that come with it.
The right property managers can help you determine the best business entity and resources you need to set it up. Working with a property manager and applying the best business incorporation strategy helps protect your rental property income and assets for long-term success!
When Should You Incorporate?
Is it too late to set up a rental property LLC if you already have rental properties?
The best time to incorporate is when you realize that real estate investing is something you plan to pursue for the long haul. Setting up a business entity with your first Seattle rental property protects your investment strategy from the beginning. Even if you stick with only one property to add passive income to your future financial plans, setting up an LLC is a smart thing to do—sooner rather than later.
However, if you're a seasoned investor with several properties (and plans for more growth), it's not too late to protect your investments with incorporation now. The best Seattle property management company can guide you to the best fit for your needs, whether you have one property as a new investor or several rentals and a few years of investing experience.
When thinking about your long-term financial future and the success of your rental properties, the right insurance coverage, a business entity, and the best property management team should all be parts of your property and income protection plan.
How Can Property Owners Create an LLC for Rental Properties?
While setting up an LLC is relatively simple, there are several steps rental property owners need to follow to do it properly. Your property manager and attorney can help!
In Washington, the process is as follows:
Name your Washington LLC. The name of your rental property business must include the words "Limited Liability Company" or "LLC" and can't be the same as any other registered business in the state.
Choose your registered agent. This is your LLC's official contact and the person or entity who will receive government correspondence. legal documents, tax forms, and any notices of lawsuits against your LLC. If you're the only person involved in your LLC, you are the registered agent.
Develop and File Your Certificate of Formation. You might also see this document as the "articles of formation. This document establishes your LLC by laying out its basic information. After creating it, file it with the Washington Secretary of State. When approved, they'll send you the appropriate documentation.
Get a Washington business license. All LLCs need this license through the Department of Revenue. You can apply for this online.
Finalize Your Operating Agreement. This helps document how your business will operate.
File an Initial Annual Report. This is due within 120 days of forming your LLC.
Get Your IRS Employer Identification Number (EIN). This number comes from the Internal Revenue Service. You'll use it to file your taxes.
While this might seem like a lot of steps, many of them take place online and can be "in progress" as you work on other tasks. However, the process is worth the protection for your rental properties!
Seattle Property Managers Help Property Owners Prioritize Protection
Watching rental income come in is exciting! However, watching it all go away can be devastating without the best property protections in place.
With the experience of the best Seattle property manager, real estate investors benefit from the best insights when setting up the right business entity to protect their investments and income. Let Real Property Associates help you experience more long-term success! Contact us to learn how we help investors protect their properties through a rental property LLC and other best practices to avoid financial losses.
Learn more about protecting your rental property business! Download our free resource, "Protecting Your Investment Property: A Guide."