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Should You Put Your Rental Property Into An LLC?
dan • April 4, 2022
If you own rental real estate, you may be wondering whether you should be holding that property in your name, or whether you should transfer it into a limited liability company (a.k.a. an LLC). There are a number of factors to consider. Even if you have decided that titling your rental property to an LLC is the way to go, there are often many more decisions to make concerning the structure and location of that LLC.
What is the purpose of an lLC?
The reason to set up an LLC is to silo off the risks associated with different assets from one another. Or to put different assets under different umbrellas, if you prefer that metaphor.
The most common concern that landlords have, after not receiving rent on time and having to make major unexpected repairs to the property, is that someone is going to be injured on the property, and that injured person is going to sue. If that happens, having the property in an LLC at least gives the landlord the argument that any resulting damages award should be entered against the LLC, not the landlord personally. Whether that argument prevails or not depends on a number of factors (Google " piercing the corporate veil " to learn about why your LLC might not stand up to judicial scrutiny). But if you have managed your LLC correctly, the purpose of this arrangement is that you should not have to pay any judgment entered against the LLC from assets or insurance outside the LLC.
What I just described is known as "inside-out risk" -- i.e. , risk arising from inside the LLC and potentially reaching assets outside the LLC. It can, however, go the other way too. If you get sued as a result of an event in your personal life ( e.g. , a car accident), you don't want the plaintiff in that lawsuit to be able to attach a lien against your rental property. An LLC might help you accomplish that.
LLCs give you the opportunity to separate business assets from personal assets, or even separate some business assets from other business assets, and potentially contain the risk associated with one asset from affecting other assets. If you own multiple rental properties, you could, for example, put them all into one LLC. Doing so would at least separate the risks associated with those rental properties from the risks associated with your personal life.
You may, however, want to consider putting each property into separate LLCs. The drawback to splitting properties up this way is the added administrative hassle of managing multiple LLCs. Even for single-member LLCs, this can get exhausting at some point, and many people fail to maintain the discipline necessary to maintain multiple bank accounts, multiple leases, multiple books, etc.
The most common concern that landlords have, after not receiving rent on time and having to make major unexpected repairs to the property, is that someone is going to be injured on the property, and that injured person is going to sue. If that happens, having the property in an LLC at least gives the landlord the argument that any resulting damages award should be entered against the LLC, not the landlord personally. Whether that argument prevails or not depends on a number of factors (Google " piercing the corporate veil " to learn about why your LLC might not stand up to judicial scrutiny). But if you have managed your LLC correctly, the purpose of this arrangement is that you should not have to pay any judgment entered against the LLC from assets or insurance outside the LLC.
What I just described is known as "inside-out risk" -- i.e. , risk arising from inside the LLC and potentially reaching assets outside the LLC. It can, however, go the other way too. If you get sued as a result of an event in your personal life ( e.g. , a car accident), you don't want the plaintiff in that lawsuit to be able to attach a lien against your rental property. An LLC might help you accomplish that.
LLCs give you the opportunity to separate business assets from personal assets, or even separate some business assets from other business assets, and potentially contain the risk associated with one asset from affecting other assets. If you own multiple rental properties, you could, for example, put them all into one LLC. Doing so would at least separate the risks associated with those rental properties from the risks associated with your personal life.
You may, however, want to consider putting each property into separate LLCs. The drawback to splitting properties up this way is the added administrative hassle of managing multiple LLCs. Even for single-member LLCs, this can get exhausting at some point, and many people fail to maintain the discipline necessary to maintain multiple bank accounts, multiple leases, multiple books, etc.
What kind of LLC should I set up?
If you are a sole operator, meaning that you are the only owner of the property and the only recipient of its income, the answer is probably straightforward. You would form a single-member LLC (in the world of LLCs, owners are referred to as "members"). The nice thing about single-member LLCs is that they do not have their own tax return. The IRS treats them as "disregarded entities," and the LLC's income is simply reported on Schedule C of your personal tax return. Also, because you don't have a business partner, having your property inside an LLC likely won't feel any different from having the property in your name.
The drawback to such LLCs is that, because there is so little administrative hassle involved, it can be difficult to argue that this truly is a business entity, separate from you and worthy of allowing you to shield your personal assets from the LLC's debts. If you have a single member LLC, it is especially important that you go out of your way to handle the LLC's assets separately from your personal assets. When it's just you, it can be easy to use the LLC's bank account for personal expenditures, and vice versa. You must not blur these lines! It may feel silly sometimes, but the optics matter greatly. If, some day, you find yourself asking a judge to honor the LLC and not authorize the collection of its debts from your personal assets, that judge will wonder why he or she should treat the LLC's assets as separate from your own if you have not done so yourself.
If you do have a business partner, the answer is also probably straightforward. You would set up a multi-member LLC. Running a multi-member LLC is usually significantly more complicated than a single-member LLC. As you may have deduced, unlike a single-member LLC, a multi-member LLC does file its own tax return. Moreover, it is strongly recommended that multi-member LLCs have operating agreements, detailing the roles, obligations, and contributions of the members. That operating agreement should probably also have detailed "buy-sell" provisions, specifying what happens if one of the members wants to exit the business (something that is a certainty to happen some day). While it may seem like this will be easy to figure out when the time comes, it usually is not. The benefit of all this hassle is that, in the event of a lawsuit, it will likely be considerably easier to prove that the LLC really is separate from its owners than it is for the owner of a single-member LLC.
A more difficult question can arise if your business partner is your spouse. Even if your business partner is your spouse, the IRS still considers that to be a multi-member LLC, and taxes that entity as a partnership, with its own separate tax return. The need for a sophisticated operating agreement, however, is probably less than when the partnership is between unrelated parties, because, unlike unrelated partners, in the worst-case scenario, married couples do have the divorce process to help them figure out who gets what.
I recently made the following video with Ryan Nguyen of Nguyen & Associates , discussing factors for married couples to consider when deciding how to structure their rental property ownership.
The drawback to such LLCs is that, because there is so little administrative hassle involved, it can be difficult to argue that this truly is a business entity, separate from you and worthy of allowing you to shield your personal assets from the LLC's debts. If you have a single member LLC, it is especially important that you go out of your way to handle the LLC's assets separately from your personal assets. When it's just you, it can be easy to use the LLC's bank account for personal expenditures, and vice versa. You must not blur these lines! It may feel silly sometimes, but the optics matter greatly. If, some day, you find yourself asking a judge to honor the LLC and not authorize the collection of its debts from your personal assets, that judge will wonder why he or she should treat the LLC's assets as separate from your own if you have not done so yourself.
If you do have a business partner, the answer is also probably straightforward. You would set up a multi-member LLC. Running a multi-member LLC is usually significantly more complicated than a single-member LLC. As you may have deduced, unlike a single-member LLC, a multi-member LLC does file its own tax return. Moreover, it is strongly recommended that multi-member LLCs have operating agreements, detailing the roles, obligations, and contributions of the members. That operating agreement should probably also have detailed "buy-sell" provisions, specifying what happens if one of the members wants to exit the business (something that is a certainty to happen some day). While it may seem like this will be easy to figure out when the time comes, it usually is not. The benefit of all this hassle is that, in the event of a lawsuit, it will likely be considerably easier to prove that the LLC really is separate from its owners than it is for the owner of a single-member LLC.
A more difficult question can arise if your business partner is your spouse. Even if your business partner is your spouse, the IRS still considers that to be a multi-member LLC, and taxes that entity as a partnership, with its own separate tax return. The need for a sophisticated operating agreement, however, is probably less than when the partnership is between unrelated parties, because, unlike unrelated partners, in the worst-case scenario, married couples do have the divorce process to help them figure out who gets what.
I recently made the following video with Ryan Nguyen of Nguyen & Associates , discussing factors for married couples to consider when deciding how to structure their rental property ownership.
What Next?
If you think it might be time to think through your rental property structure, you can:
- Give us a call at 720-821-7604 to schedule a "Discovery Session" at which we can determine whether our firm would be a good fit for your needs. Or fill out our contact form to have us call you.
- Visit our small business page to learn more about how proactively thinking through your rental property structure can help protect your assets and give you peace of mind.
- Learn more by reading our blog or watching our videos .
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Dealing with the death of a loved one is never easy, and navigating the legal process that follows can add stress during an already difficult time. In Colorado, probate is the legal process by which a deceased person’s estate is administered, their debts are paid, and their assets are distributed to beneficiaries. Whether you’re an executor, beneficiary, or family member, understanding how probate works in Colorado can help you anticipate the steps involved and your potential responsibilities. This blog post will provide an overview of the probate process in Colorado, outline when probate is necessary, and offer guidance on how to navigate the system effectively.  What is Probate? Probate is the legal process that occurs after someone dies to ensure their assets are distributed according to their will or, if there is no will, according to state law. The probate process includes validating the will, inventorying the deceased’s assets, paying off debts and taxes, and distributing the remaining assets to the rightful heirs. While probate is often associated with lengthy court proceedings, not all estates require formal probate. Colorado offers several options depending on the size and complexity of the estate, which can help simplify the process in many cases. When is Probate Necessary in Colorado? Probate is not always required in Colorado. Whether an estate must go through probate depends on the types and value of the deceased’s assets. Generally, probate is necessary if: The deceased owned real estate solely in their name. The deceased’s assets, such as bank accounts or investments, were not held in joint tenancy or designated to transfer on death. The deceased had personal property valued at over $74,000 (as of 2023). If an estate falls below this threshold and does not include real estate, the beneficiaries can often use a Small Estate Affidavit to claim the assets without going through probate. Types of Probate in Colorado Colorado has three main types of probate procedures: small estate procedures, informal probate, and formal probate. The type of probate required depends on the estate’s value and whether there are disputes among heirs or creditors. Small Estate Procedure (Collection by Affidavit) The small estate procedure can be used if the value of the deceased’s assets is less than $74,000 and does not include real estate. This process involves filling out a Small Estate Affidavit, which allows the heirs to collect and distribute the assets without opening a probate case in court. It is the simplest and fastest way to handle a small estate. Informal Probate Informal probate is used when there is a valid will and no disputes among heirs or creditors. The process is overseen by a court-appointed Personal Representative (executor), but there is minimal court supervision. Most of the process, such as distributing assets and paying debts, is handled by the Personal Representative, with only basic filings required with the court. Informal probate is less time-consuming and costly than formal probate. Formal Probate Formal probate is required when there are disputes regarding the will’s validity, disagreements among heirs, or if the estate is complex and needs court intervention. The process is supervised by the court, and all major decisions, such as approving the distribution of assets, must be approved by a judge. Formal probate can take much longer and involve more legal fees than informal probate. Steps in the Colorado Probate Process While the specific steps in probate can vary depending on the type of probate and the complexity of the estate, the general process in Colorado typically includes the following: Filing the Probate Petition The process begins with filing a Petition for Probate with the appropriate Colorado probate court. The petition is usually filed by the executor named in the will or an interested party if no will exists. Appointment of the Personal Representative The court will appoint a Personal Representative (executor) to manage the estate. If there is a valid will, the person named as executor is typically appointed. If no will exists, the court will appoint someone, usually a family member, to serve as the Personal Representative. Notice to Heirs and Creditors The Personal Representative must notify all potential heirs and creditors of the probate proceeding. This step is essential for providing an opportunity for interested parties to come forward and make claims against the estate. Inventory and Appraisal of Assets The Personal Representative must create an inventory of all the deceased’s assets and have them appraised if necessary. This inventory will include real estate, personal property, financial accounts, investments, and any other assets owned by the deceased. Paying Debts and Taxes Before distributing assets, the Personal Representative must pay off the deceased’s debts and any taxes owed. If the estate does not have enough assets to cover all debts, Colorado law dictates the order in which creditors are paid. Distribution of Assets Once all debts and taxes have been paid, the Personal Representative can distribute the remaining assets to the beneficiaries according to the will or, if no will exists, according to Colorado’s intestacy laws. Closing the Estate After all assets have been distributed and all required filings have been made with the court, the Personal Representative can file a Petition for Final Settlement to close the estate. Once approved, the Personal Representative’s responsibilities are complete. Challenges and Disputes in Colorado Probate Unfortunately, probate can sometimes become contentious, especially in cases involving high-value estates or when family members disagree on how assets should be distributed. Some common challenges in Colorado probate include: Will Contests Heirs or beneficiaries may challenge the validity of a will, claiming it was signed under duress, there was undue influence, or the deceased lacked the capacity to create the will. Will contests can significantly delay the probate process and require formal probate to resolve. Executor Misconduct If an executor is not fulfilling their duties or is mishandling estate assets, beneficiaries can file a complaint with the court and request the executor’s removal. Disputes Among Beneficiaries Disputes can arise over specific bequests, how assets are divided, or even the valuation of estate property. Mediation or formal court intervention may be necessary to resolve these disputes. How a Colorado Probate Attorney Can Help Navigating the probate process can be overwhelming, particularly when dealing with the emotional aftermath of losing a loved one. An experienced probate attorney can help in several ways: Guiding You Through the Process An attorney can explain the probate process, help you understand your rights and responsibilities, and ensure all legal requirements are met. Managing Court Filings and Deadlines Probate involves numerous legal documents and deadlines. An attorney can handle these tasks, ensuring that everything is filed correctly and on time. Resolving Disputes If disputes arise, an attorney can provide representation in negotiations, mediation, or court hearings to protect your interests and work toward a fair resolution. Minimizing Costs and Delays With the guidance of a skilled attorney, you can often minimize the time and expense associated with probate, helping ensure the process goes as smoothly as possible. How The McKenzie Law Firm, LLC Can Help At The McKenzie Law Firm, LLC, we understand the complexities of the probate process and are committed to helping families navigate it with compassion and expertise. Whether you’re an executor needing assistance with your duties or a family member looking to understand your rights, our experienced probate attorneys can provide the support you need. If you have questions about probate in Colorado or need legal assistance, contact us today to schedule a consultation. We are here to guide you through the process and ensure your loved one’s wishes are honored.
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