Creating a Rental Property LLC in Hawaii

Benefits of creating LLCs for rental properties in Hawaii

LLCs have some terrific benefits for rental property investors.

Liability Protection

A hallmark of the LLC is the liability protection it offers to the business owners. But what does that really mean? Well, an LLC is a legal entity completely separate from the business owners. It can have its own bank account, assets, and debts, among other things. This is important for owners and investors because it means that they are not personally liable for any debts or pending lawsuits of the LLC.

For example, if the LLC defaults on a debt, the creditor can only come after the LLC and seize its assets; not the personal assets of owners or investors. 

Now, just as with any legal rules, there are exceptions. LLC owners can be liable if they intentionally do something illegal or fraudulent on behalf of the LLC. They can also be liable if they personally guarantee an LLC debt and the LLC defaults on that debt. There are other exceptions, as well. 

Pass-Through Taxation

Even though the LLC is a separate legal entity, it’s not taxed as such. Instead, the owners report the LLC’s profits or losses on their personal tax returns — which is usually a lower rate than the corporate income tax rate. However, another great benefit of the LLC structure is that you get to choose your tax treatment. You have the option to be taxed as a single-member LLC, a partnership, or a corporation. 

Separation of business and personal property 

Creating an LLC allows you to keep your business and personal assets separate. There are several reasons why it’s important to separate the two.

First, for tax reasons, you don’t want to commingle business and personal property. Business owners can claim deductions for business-related expenses, but they must have the proper documentation to support the claim. If the IRS audits your LLC, you need to be able to clearly show what the expenses were for and how you paid for them. Otherwise, you may not be allowed to claim the deduction. For example, by having a separate bank account for your LLC, you can easily provide a paper trail for the IRS. 

Mixing business and personal assets can also lead to personal liability for the LLC owner. Back to our example above, if a creditor comes after the LLC for an unpaid debt and your personal assets are commingled with the business’s, the creditor may seize your assets to satisfy the debt. 

Lastly, keeping assets separate allows your LLC to build its own credit, which can result in qualifying for larger business loans. 

Series LLCs for real estate investors in Hawaii

Series LLCs are a type of LLC that allows for the separation of membership interests and assets among business owners. Think of it as a corporation with subsidiaries. Each series operates as a distinct entity with its own name, bank account, assets, and records. What’s great about this structure is each series is shielded from the liability of the other series. 

Although Hawaii doesn’t offer series LLCs, it’s still good to know what they are in case you do business in a state that allows them. 

What to know before creating a rental property LLC in Hawaii

If you think an LLC might be the right entity choice for you, there are some other things you should know before jumping in. 

How to form an LLC for your Hawaii rental property

Step 1: Choose a Name

Select a business name that’s not already in use to distinguish your Hawaii LLC. The name must adhere to Hawaii’s requirements for business names. To see if the name you want is available, do a business name search. 

Step 2: Appoint a Registered Agent

All Hawaii LLCs must have a registered agent. This person or entity is responsible for receiving important documents on behalf of the LLC. If you don’t have someone to serve, we’ll take care of that for you with our Hawaii Registered Agent Service. 

Step 3: Create an Operating Agreement

An Operating Agreement is a governing document for your LLC. It provides instructions on how the business is to operate. And if you need a bit of guidance in creating your agreement, check out our Operating Agreement templates. 

Step 4: File Articles of Organization

To officially create an LLC, you must file Articles of Organization with the Hawaii Department of Commerce and Consumer Affairs, Business Registration Division. Your submission has to include the appropriate fee. We can file your paperwork so you know everything is done correctly. 

Step 5: Apply for Employment Identification Number (EIN)

An EIN is basically a social security number for your business. Getting an EIN means that you’ve registered with the IRS, and you can now open a business bank account, get financing, and hire employees. EINs are free and you can apply for one on the IRS website, or we can do it for you. 

Step 6: Transfer Title of the Property to LLC

If you purchased a property in your name, you’ll want to transfer it to the LLC. To do this, you must file a deed with the county office where the property is located. You may also have to pay a conveyance tax, if applicable. 

Step 7: Inform the Lender of an Existing Mortgage or Loan

Once the property is in the name of the LLC, you need to let the lender know. They may need to adjust the terms or rates of the loan. 

Step 8: Update the Lease or Rental Agreement

Any rental or lease agreement needs to reflect the ownership changes of the property. If you have a current tenant or renter in place, inform them of the ownership change and update the agreement. 

Who should form a Hawaii LLC for their rental property?

LLCs are a good idea for anyone looking to get into renting Hawaii vacation properties or residential real estate. 

It’s much easier to create a Hawaii real estate LLC before purchasing rental properties. Once the LLC is established, you can buy the properties through the LLC and the deed will be under the LLC’s name. This avoids having to file extra paperwork to retitle the deed if you purchased the property under your name.

How We Can Help

Becoming an official business owner is an exciting time! In addition to our LLC formation services, we have many different compliance tools and products to help support your business throughout its lifecycle. No matter how small or large your business is, we can help make the minutia of running it day in and day out smoother and easier.