Is an LLC the Right Structure for my Vacation Rental Property?

Is an LLC the Right Structure for my Vacation Rental Property?

You’re probably already familiar with the gig economy if you’ve heard of Uber, Airbnb, DoorDash, or Care.com. This new trend has gained popularity in recent years as more individuals choose to supplement their income by doing things like food delivery or vacation property rentals. By 2023, the gig economy is expected to expand at a rate of 17.4 percent, with no signs of slowing down. Combine that with the fact that small businesses account for approximately half of all GDP in the United States.

The short-term rental sector often intersects with these two expanding economies. Although holiday rentals are no longer considered side jobs, many individuals still manage and rent out vacation houses on a limited basis, with just one or two properties. If your vacation rental has grown into a successful company in its own right, it may be time to consider forming an LLC.

What is a Vacation Rentals LLC?

You may have heard of an LLC (Limited Liability Company) in the corporate world. An LLC is a corporate structure in which the company’s owners are not individually accountable for the company’s debts or obligations. Simply stated, it provides vacation rental owners with an additional degree of security.

Turning your vacation rental into an LLC protects you and the other “members,” such as the company’s owners or any backers, from personal liability in the event of financial difficulties.

There are no precise requirements or procedures for forming an LLC when it comes to holiday rentals. However, LLCs are exclusively for registered business organizations, which means you must satisfy specific requirements. The licenses and permissions are required to differ by state, but if you don’t already have one, this would be the first step before forming an LLC.

Vacation rentals would go through the same procedures as any other business. We’ll go through the procedure in more detail later, but for now, let’s look at some of the benefits and drawbacks.

The Benefits and Drawbacks of Using an LLC for Short-Term Rentals

There are several benefits to forming an LLC for your short-term rental company, but if it were too simple, everyone would do it! Depending on your state or area, it may be a difficult procedure, but there are compelling reasons to do so while also considering some of the drawbacks before making a final choice. There will always be downsides to every business action, just as there will always be benefits.

LLCs have the Advantage of Protecting your Assets

You’ll need to prove that your short-term rental company is just that: a company. The worst-case scenario is when a small company owner is forced to shut their doors and loses everything. Fortunately, there are strategies to protect your assets if your small company fails.

If your holiday rental house is a hobby or side project from the perspective of the US government, you are liable for any losses. On the other hand, if your property is a well-established company, your revenues are protected if anything goes wrong financially. It will be seen as your company’s responsibility rather than your miscalculations.

Cons: Limited Liability Companies (LLCs) are Expensive

Converting your short-term rental company to an LLC can save you money, but there is an upfront investment. It is not free to form an LLC, and in certain places, such as New York, where the filing fee alone may be as much as $4,500, it can be rather costly. Aside from the filing expenses, there are additional fees for getting an employer identification number (EIN) and a one-time fee for the Operation Agreement.

You’ll also have to add in the expense of an attorney, accountant, CPA, or financial adviser if you don’t feel comfortable navigating the legal and accounting world. The cost of engaging a professional might easily surpass the costs, depending on the intricacy of your case.

Before converting your vacation rental firm to an LLC, you should carefully consider the costs. The price of an LLC licensing may pile up quickly, and it may not be the best option for your property.

Pro: Limited Liability Companies (LLCs) Provide Tax Advantages

The initial cost of an LLC may be high, but the tax advantages make the conversion worthwhile for some people. When you register your vacation rental as a company, you’ll be eligible for extra tax deductions. Repairs, property taxes, house loan interest, and running expenditures (including your Lodgify membership!) may all be deductible depending on your state.

Con: With Tax Advantages also Come Disadvantages

The Internal Revenue Service (IRS) is a difficult system to navigate. In certain cases, you may save money on taxes, but the government makes owning a company too expensive in others. There are certain extra tax responsibilities when filing taxes as an LLC that you wouldn’t have to worry about if you didn’t have the LLC title.

If your vacation rental firm is located in California, for example, you will be required to pay an annual franchise tax of $800.

Naturally, the more money you make via your vacation rental LLC, the more taxes you’ll have to pay. Regardless of the title, this is standard procedure, although your tax filing may be scrutinized more closely if you have an LLC status than if you don’t.

Individuals without a company are 5 to 12 times more likely to be audited than vacation rental operators who register as an LLC. Audits may be expensive for company owners, so be prepared for more monitoring and the expenditures associated with more regular audits.

Pro: It Simplifies Vacation Rental Accounting

Managing your money while running a company may be difficult and dangerous. You may minimize accounting errors and tax miscalculations by forming an LLC for your vacation rental firm. The majority of LLCs are automatically set up as pass-through businesses, which means that the company’s profits are paid to the owner (s). Instead of having to worry about whose bank accounts your cash and bills go to, your net income will go straight to the LLC’s owners. You won’t have to bother about manually dispersing revenue now that your profits are streamlined into your account.

Another advantage for some LLC owners is that when it comes time to file taxes, the LLC owners will pay based on their tax rate rather than a corporation tax rate.

You may use the Lodgify accounting application to keep better track of your money. Making your vacation rental a limited liability company (LLC) will make your finances easier to handle, but Lodgify will simplify them.

Con: You Could Run into Financial Difficulties

An LLC has no personal responsibility, which is a great positive for you but a significant disadvantage for banks and lenders. Lenders are wary of giving financing choices to LLCs since they don’t take any personal accountability for things like mortgage payments.

If you’re looking for a loan as an LLC, you could have difficulty finding a lender willing to take on that risk. You might get into difficulty even if you’re converting an existing firm with a mortgage to an LLC. Lenders may demand full repayment of a mortgage if a borrower converts to an LLC, according to the due-on-sale clause, sometimes known as the acceleration clause. Lenders will often exercise this provision if they have reason to think there is a danger. Still, there are alternative options to prevent this from occurring, such as cosigning or moving the property to a living trust.

For Vacation rentals, LLC vs. Simple Sole Proprietorship

The liability is the most important distinction, as suggested by the LLC name. Personal responsibility is not required for LLCs but a Simple Sole Proprietorship. An SSP (Simple Sole Proprietorship) is also a one-person business. On the other hand, an LLC is administered by whoever is designated as a “member” of the company, making it a preferable alternative for couples or vacation rental firms with several owners.

Because of its simplicity, some homeowners may find the SSP to be a superior alternative. In terms of owner protection, it’s a lot more simple, but it’s also a lot easier as a consequence. There is no split of the company for sole owners, which is something to bear in mind. In contrast to an LLC, which functions as a barrier, taxes, fees, and obligations are all directly related to the owner.

The choice of the best solution is up to the vacation rental owner. If there is less danger of responsibility, an SSP may be simpler and less expensive. On the other hand, an LLC is ideal for property owners who have a greater level of responsibility, such as multi-unit vacation rental firms.

How to Form a Limited Liability Company (LLC) for a Shared Vacation Home

You’ll need to understand how to form an LLC after choosing the best option for your vacation rental company. This is where we can help! Converting your company to an LLC can save you a lot of time and money in the long term, but it will take some time and work upfront. Jumping through bureaucratic hurdles isn’t easy, but it’s just a one-time procedure. You’ll never have to do it again after you’ve established your company as an official LLC.

Because the formation of an LLC for a vacation rental company varies depending on the circumstances, it’s essential to get advice from a local financial expert or attorney. You may begin gathering some of the necessary papers to better prepare for the application process. You’ll need at the very least:

  • Your company name 
  • Registered agents 
  • Operating Agreement 
  • Articles of Organization (available on your Secretary of State website) 
  • Business licenses and permits 
  • Statement of Information form 
  • Local licenses and registrations

The procedure will differ depending on where you file, so be sure to familiarise yourself with your state’s LLC laws before proceeding. This, too, will vary in terms of time. The procedure usually takes 7-10 business days to complete; however, certain states, such as Arizona, have a 4-6 week timeframe.

Another element to consider is the amount of time required for preparation. Some of the required paperwork has its own set of procedures. For example, it takes time to get company permits and an EIN (employer identification number). Ensure all relevant documents are ready before you schedule your LLC filing appointment to ensure a seamless procedure.

Should I form a limited liability company (LLC) for my Airbnb?

Airbnb started as a side enterprise for regular people. Consequently, many people are unsure if Airbnb is a legal “company.” The fact is that for many people, Airbnb is a full-time job, not a side hustle. Depending on how much money you make through Airbnb, it may be worthwhile to form an LLC for your business. There is no difference between an Airbnb LLC and a regular holiday rental LLC. It’s all a matter of personal choice. If you feel your Airbnb has a minimal liability, an LLC may not be the best option.

Takeaways: Should your Vacation Rental Property be Organized as a Limited Liability Company (LLC)?

Whether or not to form an LLC for your vacation rental company is ultimately a personal choice. You must choose what is best for you and your company. To summarise, the following are some of the aspects to think about:

  • Personal responsibility 
  • Tax advantages and alternatives
  • LLC members who are required 
  • LLC income distribution

Some vacation rental owners may choose to operate their firm as a sole proprietorship or general partnership as an alternative to an LLC license. In the end, the appropriate license will be determined by the company owner. Having an LLC for your vacation rental might be the best option you make to give your company respectability.

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