There are so many niches you can fill as a business owner — professional services, retail, entertainment, and running a rental property, just to name a few. After all, people need places to sleep at night, or they might need a location to set up a storefront or warehouse space. Your business could be one of many that offers these spaces for rent, but you want to set it up the right way to avoid trouble down the road. There are a few entity types you can use to set up a rental property business in Alabama, but the most popular choice is setting the business up as a limited liability company (LLC).
If you’re thinking of setting up a rental property LLC in Alabama, we have the resources to help you hit the ground running on your new venture. Our Alabama LLC Formation Service gives you a quick and easy way to start your rental property LLC so you have more time to develop and execute your business vision. And we don’t leave you once you’ve gotten your business off the ground. You can find a number of additional products and services that support your business venture at every stage of its development.
To form an LLC in Alabama, you have to first choose an appropriate name that abides by state law.
Then, you must obtain a Certificate of Name Reservation from the Alabama Secretary of State.
After reserving your name, you must fill out and file a Certificate of Formation with the Secretary of State.
From there, you can either buy property in the LLC’s name or transfer the deed of a property you already own to the LLC. Make sure all of your taxes are paid before you attempt to transfer title via written deed. Deeds transferring title need to be written on paper, signed, and witnessed by two people. Once the deed is properly executed, you file it in the county where the property is.
Many properties also have mortgages. If you’re transferring a mortgaged property to your LLC, you need to change the mortgage paperwork to reflect the correct owners. Also, the terms and rates of the mortgage are likely to change. Additionally, you need to update any lease agreements to reflect changes of ownership. You also need to notify your current tenants about the change.
Extra paperwork is normally involved in forming and running your rental property business as an LLC, but it’s often worth the administrative hassle.
Forming an LLC for your rental properties can give you financial benefits similar to those of a sole proprietorship. It can also give you legal benefits similar to those of a corporation.
Whether you’ve lived in a rental property or outright owned your living space, you likely know that things can go wrong. A pipe might burst, lease terms might get breached, or someone might get hurt. If you were a sole proprietor of your rental property business, a tenant could sue you personally for any harm they suffered on your property, for lease disputes, or for many other claims. But if you run your rental as an LLC, you can reduce personally liable if something goes wrong. Similar to corporate disputes, a tenant or other third party usually has to sue the LLC to address their issues.
So if LLCs and corporations limit their owners’ liabilities in legal disputes, why not run your investment property as a corporation? The choice is yours, but forming and running a corporation requires you to follow more formalities, and you are subject to double taxation with a corporation. Double taxation means that the standard corporation has to pay taxes on its income, and then its shareholders have to pay income taxes on their distributions from that income. The LLC tax structure is simpler and normally less expensive. The LLC itself doesn’t pay taxes. Rather, each owner pays personal income taxes on their share of distributions from the LLC’s income.
It’s usually a mistake to mix your business and your personal life, especially when it comes to financial assets. Forming an LLC for your rental properties helps you avoid making that mistake. As we explained above, legal disputes with your LLC normally go straight to the LLC, so they usually won’t affect you personally. Also, if your LLC runs into financial problems, its creditors generally can’t come after your personal assets and must settle their scores with the LLC itself.
You’re probably seeing all the opportunities for growth when running a rental property LLC. You could have multiple properties in different locations, pulling in rental income from many directions and diversifying your portfolio. But what happens if one property runs into legal or financial issues while the others thrive? Do they all fall like dominoes? They don’t have to. To protect each individual property, you can set up a series LLC.
A series LLC separates the multiple assets or properties of an LLC into its own insulated groups. In the context of rental properties, this means that if one property in its own series has a legal or financial issue, a third party can’t sue an LLC property in a separate series to recoup their losses.
It’s a good idea for anyone seeking to run a rental property business to run it as an LLC. As stated above, there are a lot of great protections you can receive through an LLC.
LLCs have the right to own real estate. Because of this characteristic, it’s often easier to form your LLC first and then purchase the property in the LLC’s name. But don’t fret if you’ve already purchased your rental property and you haven’t formed your LLC yet. There’s a little extra work to do, but we can give you information on how to transfer property to your LLC.
Starting a new business venture can be exciting and a little bit scary. But our services can help quell your fears. With our Alabama LLC Formation service and other formation and state compliance services, we can take a lot of the guesswork out of starting your new business. With our support, you can put more focus into growing your business.
Disclaimer – The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Creating an LLC for your rental property can protect you from personal, legal, and financial liability for your business.
In general, your LLC’s name must have “Limited Liability Company,” “LLC,” or “L.L.C.” in it. Also, the name can’t reflect an unlawful purpose and must be distinguishable from other names registered in the state.
If your Alabama LLC owns rental property in your home state, you likely have to register it as a foreign entity there. It’s important to check with your home state’s authorities about the rules.
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