Creating a Rental Property LLC in Ohio

A rental property LLC can be a great way to protect your real estate investments in the Buckeye State, setting you up for a secure and profitable business venture. But what is a rental property LLC, and how do you create one? And why is it such an advantageous prospect? 

In this guide, we’ll walk you through the essentials of creating a rental property LLC step by step so you can enjoy the structure’s benefits to the fullest. We’ll also discuss what to do after you’ve started one, tax benefits, and even alternatives if an LLC isn’t quite right for you. Let’s get started. 

Do you need an LLC for your rental property in Ohio?

Deciding whether to form a limited liability company (LLC) for your rental property in Ohio hinges on several key factors, including the scale of your real estate investments, your appetite for personal asset protection, and your overarching business objectives. For those who own multiple rental properties, establishing an LLC can be a strategic move, offering a layer of protection against personal liability and potentially streamlining business operations. It’s not just about safeguarding assets; it’s also about setting a foundation for growth and professional management of your rental endeavors.

Property owners looking for liability protection find LLCs particularly advantageous. By separating personal assets from those of the business, an LLC limits your exposure to potential lawsuits related to the property. This structure is not only suitable for investors with a portfolio of properties but also for those who might own a single rental property yet aspire for professional management and long-term business goals. 

Whether you’re a seasoned investor or contemplating your first rental property purchase, understanding how an LLC can align with your business strategy is crucial for making informed decisions about your real estate investments.

What to Know Before Creating an LLC for a Rental Property in Ohio

Before embarking on the formation of an LLC for your rental property in Ohio, it’s vital to grasp the state-specific regulations and key considerations that will influence your decision. Ohio mandates that all new LLCs appoint a statutory agent and file Articles of Organization with the Secretary of State, a process that includes choosing a unique name for your LLC and adhering to state-specific naming requirements. 

Moreover, understanding Ohio’s tax implications for LLCs, including the state’s Commercial Activity Tax (CAT) for businesses with gross receipts over a certain threshold, is crucial. Potential LLC owners should also be mindful of local zoning laws and housing codes, which can affect rental property operations.

Then there are practical considerations like getting a separate bank account, insurance, and more. Familiarizing yourself with these details before forming an LLC can pave the way for a more structured and successful rental property business in Ohio. 

How to Start Your Rental Property LLC in Ohio: 9 Important Steps to Follow

Starting a rental LLC is an important legal process, but if you follow the right steps can be relatively straightforward. Here are the nine essential steps to starting a rental property business in the Buckeye State.

Step 1: Choose a name for your LLC

Selecting a unique and legally compliant name for your LLC in Ohio is paramount. Your chosen name should reflect your brand and be easily distinguishable from existing businesses registered in Ohio. The name must end with “LLC,” “L.L.C.,” or “Limited Liability Company.” Check for name availability through the Ohio Secretary of State’s website to ensure your desired name is not already in use. A state trademark search and a federal search with the United States Patent and Trademark Office’s website are essential, too. This preliminary step sets the stage for brand identity and legal operations.

Step 2: Designate a statutory agent

An Ohio statutory agent, or registered agent, is essential for your LLC, acting as the receiver of legal documents and some government correspondence on behalf of your business. In Ohio, your statutory agent must have a physical address within the state. You may appoint an individual within the company, including yourself, or hire a professional service. Ensuring your agent is reliable and always available during business hours is critical for maintaining good standing with the state.

Step 3: File your Articles of Organization

To officially form your LLC in Ohio, you must file the Articles of Organization with the Ohio Secretary of State. This document includes basic information about your LLC, such as the LLC name, address, statutory agent details, and whether it will be member-managed or manager-managed. Filing can be done online or by mail, and it comes with a $99 filing fee. This step legally establishes your LLC in the state.

Step 4: Create an operating agreement

Although Ohio doesn’t require LLCs to have an operating agreement, drafting one is highly recommended. This internal document outlines the LLC’s management structure, financial arrangements, and operating procedures, offering a clear guide for decision-making and conflict resolution within your company. An LLC operating agreement helps solidify the governance of your LLC and can help protect the business’s and members’ interests.

Step 5: Obtain an employer identification number (EIN)

An EIN, issued by the IRS, is like a Social Security number for your LLC. It’s necessary for tax purposes, hiring employees, and setting up a business bank account. Obtaining an EIN is free and can be done quickly online or by mail through the IRS website. This number is crucial for the financial identity and tax obligations of your LLC.

Step 6: File a BOI report with FinCEN

Starting in 2024, certain businesses, including LLCs, will need to file a Beneficial Ownership Information (BOI) report with the Financial Crimes Enforcement Network (FinCEN). The BOI report aims to enhance transparency by providing information about the individuals who own, control, and profit from companies. Check the specific requirements to understand if and when your LLC must comply.

Step 7: Register for state taxes with the Ohio Department of Taxation

Depending on your LLC’s activities, you may need to register for specific state taxes, such as sales tax or employer taxes. Registering with the Ohio Department of Taxation is a critical step to ensure your LLC complies with state tax obligations. This process can typically be completed online through the department’s website.

Step 8: Comply with other tax and regulatory requirements

Your LLC may need to obtain local permits and licenses depending on its location and the nature of its business. Additionally, if you sell goods or have employees, you might need to comply with specific tax requirements like sales tax collection or payroll tax withholding. Research and adhere to all relevant local and state regulations to operate legally.

If you’re not sure what licenses and permits you’ll need, our business license report can help. 

Step 9: Open a business bank account

Opening a separate bank account for your LLC is essential for managing your business’s finances. It helps maintain the legal distinction between personal and business assets, simplifying accounting and tax filing. To open an account, you’ll need your EIN and possibly your Articles of Organization, along with other documentation required by your bank.

Following these steps will lay a solid foundation for your rental property LLC in Ohio, helping ensure compliance and facilitating business operations.

Cost of Creating an LLC for a Rental Property

An LLC comes with a variety of costs you’ll want to budget for. Here are some of the most common start-up costs you can expect in Ohio: 

• Articles of Organization: $99 (but subject to change and convenience fees)
• Statutory Agent Fee: Varies based on the service you hire, but typically ranges between $100-$300 per year
• Business Licenses and Permits: Varies depending on city and county requirements
• Commercial Activity Tax (CAT): Applies to businesses with $150,000 or more in annual gross receipts
• Property Tax: Varies based on county and city fees

Benefits of Creating LLCs for Rental Properties in Ohio

Forming an LLC for rental properties in Ohio offers several organizational and legal benefits, streamlining business operations and providing significant protections for property owners. Here’s an overview of the key advantages:

• Personal Liability Protection: One of the primary benefits of an LLC is the protection of personal assets. In the event of a lawsuit or business debt, your personal assets (home, car, personal bank accounts) are generally protected from creditors and legal actions against the business.
• Pass-Through Taxation: LLCs typically benefit from pass-through taxation, where the business itself isn’t taxed directly. Instead, profits and losses are passed through to the individual members’ tax returns, potentially avoiding the double taxation that corporations can face.
• Separation of Business and Personal Assets: Forming an LLC for your rental property encourages the separation of business and personal finances, which is not only beneficial for tax purposes but also simplifies accounting and financial management.
• Flexibility in Management and Ownership: LLCs offer flexibility in how they are managed and structured. Members can manage the LLC, or they can appoint managers to handle the day-to-day operations, allowing for a structure that best suits the property owner’s (or owners’) needs.
• Credibility with Tenants and Partners: Operating your rental properties through an LLC can enhance your business’s credibility with potential tenants, partners, and lenders. An LLC signifies a formal commitment to your business, which can be advantageous in various business dealings and relationships.

While there are specific tax benefits associated with forming an LLC, these general organizational advantages make it an attractive option for rental property owners in Ohio, providing a strong foundation for both new and seasoned investors.

Tax Benefits

Forming an LLC for rental properties not only offers organizational and legal benefits but also presents significant tax advantages. Understanding these benefits can help property owners optimize their tax obligations and enhance profitability.

How a Rental Property LLC Is Taxed in Ohio

In Ohio, LLCs typically enjoy pass-through taxation, meaning the LLC itself doesn’t pay corporate taxes. Instead, profits and losses are passed directly to the owners’ personal tax returns, thus avoiding the double taxation faced by C corporations. This tax treatment applies to rental income, with taxes due on the profits at the owners’ personal income tax rates. Additionally, Ohio’s Commercial Activity Tax (CAT) applies to businesses, including LLCs, with gross receipts over a specific threshold, impacting larger rental operations.

Schedule E or Schedule C

The tax reporting for rental income through an LLC depends on how actively you’re involved in managing the property. Generally, rental income is reported on Schedule E (Supplemental Income and Loss), which is used for passive income generated from real estate investments. This method typically benefits rental property owners by avoiding self-employment taxes on rental income.

However, if your LLC provides substantial services to tenants or operates more like a traditional business (for example, a bed and breakfast or a property with short-term rentals), the IRS may classify it as an active business. In such cases, income and expenses would be reported on Schedule C (Profit or Loss from Business), subjecting the income to self-employment taxes but also allowing for additional types of deductions.

Tax Deductions to Know About

LLCs that own rental properties can take advantage of various tax deductions to reduce their taxable income, including:

• Mortgage Interest: One of the largest deductions, this applies to interest paid on a loan used to buy, build, or improve the rental property.
• Property Taxes: State, county, and city property taxes on rental properties are fully deductible.
• Operating Expenses: All costs incurred in the day-to-day operation of the rental property, including utilities, maintenance, and repairs.
• Depreciation: This allows property owners to deduct a portion of the cost of the property itself and improvements over several years.
• Insurance: Premiums for rental property insurance and landlord liability insurance are deductible.
• Professional Services: Fees for legal advice, property management, accounting, and other professional services can be deducted.
• Travel Expenses: Costs incurred for traveling to and from the property for management purposes can be deductible, subject to IRS rules and limitations.
• Advertising: Expenses for marketing your rental property are fully deductible.

Leveraging these deductions effectively can significantly impact the profitability of rental properties managed through an LLC in Ohio. As tax laws and regulations can be complex and subject to change, consulting with a tax professional familiar with real estate and LLCs is advisable to ensure compliance and maximization of tax benefits.

Drawbacks of an LLC for your Property Rental 

While forming an LLC for your rental property in Ohio offers significant benefits, it’s important to consider potential drawbacks. One notable downside is the increased complexity and administrative overhead. Operating as an LLC means adhering to more stringent record-keeping and compliance requirements, such as filing Articles of Organization, maintaining a registered agent, and managing separate tax filings. These tasks can be time-consuming and may require hiring professionals, such as accountants or attorneys, to ensure accuracy and compliance.

Additionally, the initial and ongoing costs associated with forming and maintaining an LLC can be higher than operating as a sole proprietor or partnership. These costs include filing fees, potential registered agent fees, and possibly higher insurance premiums for commercial policies suitable for LLCs. For small-scale landlords or those with only one rental property, the benefits of an LLC may not always justify these additional costs and complexities. Therefore, it’s crucial to weigh the advantages of liability protection and tax benefits against these potential drawbacks to determine if an LLC is the right structure for your rental property business.

Types of Rental Properties That Are Approved to Be an LLC 

Here are some of the types of properties that are eligible to be structured as a real estate LLC in Ohio: 

• Single-Family Homes
• Multi-Family Properties
• Commercial Properties
• Mixed-Use Properties
• Vacation Rentals
• Industrial Properties
• Mobile Home Parks
• Land Lease Properties
• Student Housing
• Senior Living Facilities

Other Types of Business Formations for Rental Property Businesses

If you’re not sold on the idea of forming an Ohio LLC for your rental property, there are some alternatives to consider. Here are some of the most popular choices and how they stack up: 

• Sole Proprietorship vs. LLC: Sole proprietorships offer simplicity and full control but expose owners to personal liability for debts and legal actions. LLCs, while more complex and costly to establish, provide personal liability protection and pass-through taxation, separating personal assets from business liabilities.
• Trust vs. LLC: Trusts serve estate planning purposes, allowing rental properties to bypass probate, but generally don’t offer the same liability protection as LLCs. LLCs provide substantial liability protection and flexibility in management but require adherence to more regulatory requirements than trusts.
• Corporation vs. LLC: Corporations are ideal for businesses seeking to raise capital and offer liability protection but face double taxation and rigid operational structures. LLCs offer similar liability protections with the added benefits of pass-through taxation and operational flexibility, making them suitable for smaller, privately-held rental property businesses.

If you’re not sure which structure is right for your rental property company, please consult with an experienced Ohio business attorney. They’ll be able to give you customized guidance on which structure best fits your goals and needs.

We can help you form your rental property LLC today 

Starting an LLC is an important legal process, but it isn’t one you have to go alone. Here at ZenBusiness, we specialize in making the business formation process hassle-free. Whether you need help filing your Articles of Organization, setting up a website for your rental business, maintaining compliance stress-free, or anything in between, we can help you handle the paperwork. Let us free up your schedule so you can focus on what you love: managing beautiful properties.

Resources

Want some extra help while getting started? Check out these resources.

• Ohio Small Business Development Centers: The Small Business Development Center network provides Ohio’s entrepreneurs with everything they need to succeed: business counseling, assessment, help developing financial projections, and much more, all with the help of Certified Business Advisors.
• Internal Revenue Service (IRS): The IRS website is an essential resource for tax guidance, deduction options, and updates for the tax code. 
• U.S. Small Business Administration (SBA):  The Small Business Administration offers a wealth of resources for small business owners, from grant opportunities, to training, and more. 
• U.S. Securities and Exchange Commission (SEC): If you’re looking to attract investors sometime down the line, adhering to SEC regulations is essential. 
• U.S. Department of Housing and Urban Development (HUD): While not directly related to forming an LLC, the HUD website offers valuable information for rental property owners, including fair housing laws, housing programs, and resources for landlords.