I am about to close on my first rental property in a about a month. My business partner and I have been discussing getting an LLC and opening a bank account under the LLC in order to keep our personal finances separate from our business finances, as well as keep taxes simple. We would still leave the property in one of our names (to avoid the due on sales clause) and funnel all income/expenses through the LLC's bank account. To protect our personal assets we plan on getting insurance on the property, along with an umbrella insurance policy for liability purposes. Does this seem reasonable or is there a better method?
Sounds reasonable to me, but you should also consult with an attorney and CPA just to make sure you are acting in your best interests and the best interests of the business.
All you need is a separate bank account used exclusively for the business.. It is not necessary to have a LLC.
I agree with @BobOkenwa, talk to a local CPA. An LLC will protect you if anything where to go wrong with tenants on the property, but an LLC has no tax structure. So you may be defaulted into a high tax bracket (Sole prop and partnership are both subject to a self employment tax of 15.3%) When you talk to your CPA ask about becoming an LLC but being taxed as a S or C corporation. With an LLC you get to choose how you are taxed. You file for an Entity Classification Election. I have attached the IRS website on the topic for you:
Good Luck with the rental!
Originally posted by @Hayden Tuggle :
An LLC will protect you if anything where to go wrong with tenants on the property,
Not if the property is still in the partners personal name! We formed an LLC long after purchasing and had no issues with "due on sale". But there's nothing wrong with just opening a joint personal bank account, that's how my wife and I ran ours for many years with no hassles. Just get an umbrella policy for more protection. How you both would file a Form E on the property is a mystery to me though. We filed jointly so it wasn't an issue. Maybe some kind of partnership is required even if not an LLC. Accountant question.