Creating a Rental Property LLC in Illinois

What to know before creating a rental property LLC in Illinois

Before you create your rental property LLC in Illinois, let’s go over the three general benefits of a limited liability company.  First, it grants limited liability protection to its owners (i.e., “members”) from personal liability.  Second, it provides pass-through taxation, meaning any income is taxed at the member’s personal income tax rate rather than the state corporate tax rate. Third, if used properly, LLCs make a bright-line distinction between what property it owns and what property is owned by their members.

Along with these three benefits, Illinois also offers a “series LLC.” For rental property, this means that you have a “master LLC” that owns several other LLCs; and each of these LLCs owns a rental property.

The purpose of a series LLC is twofold. The first is to attract investors. Series LLCs do this by offering ownership in the master LLC, which in turn can grant indirect ownership of each of the subsidiary LLCs in the series.

The second benefit is, if an event arises in one of the subsidiary LLCs (e.g., a tenant is injured), that event should be legally isolated from all of the other subsidiary LLCs and the master LLC.

How to form an LLC for your Illinois rental property:

Step 1: Choose LLC Name

When selecting a name for your LLC, be sure to choose one that meets Illinois’s requirements. We can do a search for you to see if the business name you want is available. If it is, let us reserve the name while you get the filing paperwork together. 

Step 2: Select Registered Agent

Businesses in Illinois are required to appoint a registered agent. This person is responsible for receiving important documents on behalf of the LLC, such as state correspondence and legal notices. If you need an Illinois registered agent, we can help you find one.  

Step 3: File Certificate of Organization

To officially form your rental property LLC in Illinois, you need to file a Certificate of Organization with the Secretary of State and include the appropriate filing fee. With our LLC Formation Service, we can file your documents for you. 

Step 4: Create an Operating Agreement

Your LLC’s Operating Agreement is one of your most important business documents. It governs how your LLC runs and provides instructions for anything from voting procedures to dissolving the company. If you’re not sure how to create an Operating Agreement, we offer templates that can serve as a guide. 

Step 5: Apply for Employment Identification Number (EIN)

The IRS assigns businesses a nine-digit EIN that is used to identify their enterprise. An EIN is like a social security number for your LLC. Having one is necessary for certain business matters, such as opening a business bank account, hiring employees, and getting financing. 

You can apply for an EIN yourself on the IRS’s website, or we can do it for you with our EIN service. 

Step 6: Transfer Title 

If you purchased a property in your individual name prior to forming the LLC, you’ll need to transfer the title of the property to the LLC. The new deed transferring ownership has to be filed with the county clerk’s office where the property is located. 

Step 7: Inform Lender

If you have a mortgage on the property, check with your mortgage company to make sure that the transfer won’t affect the mortgage. Then make sure that the mortgage company drafts the proper documents to name the LLC as the new borrower (note that the transfer may also trigger new loan terms and an adjustment of the loan rate).

Finally, if you have tenants and a lease in place, you’ll need to make all of the proper amendments to the lease. It’s also a good idea to inform your tenants of the new owner.

Who should form an Illinois LLC for their rental property?

Separating investment property from personal assets is always a good idea.  It’s even a better idea if you are planning on owning more than one rental property, or if you have any plans to make this a larger business venture. In those cases, we strongly suggest you form an Illinois rental property LLC rather than owning it as a sole proprietorship.

If you decide to establish an Illinois rental property LLC, then it’s important that you form the LLC before you begin to look for a potential rental property to buy. You want to do this because real estate transactions focus heavily on the identity of the buyer, and they do this for two reasons. The first reason is for financing purposes. The identity of the buyer influences which types of loans may be approved for purchase, how much they may finance, interest rates, and loan terms. Second, the deed to the real property must name the correct owner, which is the buyer on the real estate contract, and the borrower of financing.

Additionally, if you buy the rental property in your name and later decide to transfer it to an LLC, this will create a lot of extra work. For starters, transferring the property from your name to an LLC could complicate or terminate any financing for the property. You’ll also have to transfer the ownership on the local land records by filing a new deed. As a last consideration, a transfer of the property may trigger an unwelcome tax event. 

How We Can Help

We have a whole host of services to help you form your Illinois rental property LLC. We also offer our Worry-Free Compliance Service to help you stay in compliance, and Accounting Services to help you maintain accurate records. Contact us to see how easy it is for you to take this next step in rental property ownership.