The Benefits of Creating a Florida Rental Property LLC

The Benefits of Creating a Florida Rental Property LLC

Too few landlords in Florida know just how much they stand to benefit by forming a Florida Rental Property LLC. An LLC is a type of business entity favored by many small business owners and entrepreneurs for the flexibility and protections that it provides. You can start one on your own, or with any number of partners. Owners of an LLC are known as its “Members.” Now let’s get into what you, as a landlord, stand to gain from creating an LLC for your rental properties.

So, how can an LLC make life easier for landlords and other property owners in Florida?

Excellent Liability Protection

As a business owner, a Florida Rental Property LLC is designed to limit your personal liability and provide asset protection in the event of litigation. This is done by legally separating the business owner from the business itself. This way, if the business faces litigation, you only risk losing the business’s assets and not your own. Without an LLC to protect you, you could lose everything you’ve worked for and more should things go south.

Separate Your Business and Personal Assets

An important component of enjoying the protections of an LLC is keeping your personal assets and your business assets separated. Keep different credit cards and bank accounts for your business and personal use. This will make it easier to track business expenses and keep track of your finances in general. And most importantly, it ensures that your own finances and property won’t be at risk if your business faces a lawsuit.

Insulate Your Different Properties

If you plan on renting multiple properties, then your personal assets aren’t the only things that you should keep separate. Your rental properties should be separated from each other, too. You can do this by creating a different LLC for each property. This way, a lawsuit against one property won’t negatively impact another. The importance of this protection cannot be overstated.

Avoid Double Taxation

Another reason behind the popularity of LLCs is that they are a good way to avoid double taxation. Double taxation occurs when a corporation is taxed directly on its profits and its owners are taxed again on their own income. LLC gives you the benefit of “pass-through” taxation. In other words, an LLC allows you to pass all income made by your LLC on to your individual income tax returns, where it will then be taxed. For most LLCs, this is an easy way to minimize taxes.

Click here for an overview of LLC taxes.

Perfect for Multiple Property Owners

An LLC is a good idea for any landlord, whether you’re renting out multiple properties or just the one. Pass-through taxation and liability protection are beneficial enough in their own right. However, there are less direct advantages to an LLC as well. This is especially true if you plan on working with one or more partners. Many Florida LLCs contain what is known as an Operating Agreement. An Operating Agreement is a type of document that specifies the rights and responsibilities of each Member, among other things. Having one can help to streamline management and avoid conflicts before they arise.

For a deeper dive on the different ways that a rental property LLC can be managed, head on over to our page on LLC management structures here.

Does it Matter if Property is Purchased Before or Forming a Florida Rental Property LLC?

So you created your LLC after you purchased the rental property. Don’t worry – that doesn’t mean that it’s too late to enjoy liability protection! Regardless of when your business was organized, you will still be able to transfer the property rights on to the LLC. Still, if you formed your LLC after the fact, then there will be a few extra hurdles for you to jump over.

First, you will need to let the mortgage holder know that you are transferring the title over to the LLC. At this point, the mortgage holder can choose to close the loan (imposing extra closing costs on you) or to issue you a new one with a higher interest rate. Those who created their LLC beforehand can buy the property under the LLC’s name and receive a property deed in its name as well.

Those who owned rental property before starting their LLC will also be required to notify any tenants that the property is under new ownership. Rental leases will need to be updated, too. You should also keep in mind that converting over to an LLC post-purchase might subject you to new taxes, such as a Title Transfer Tax.

Transferring the Property Title to Your LLC

In property law, a “property title” can refer to two different things. The first is a collection of rights that define the ownership of a given property while the second is a formal document that proves ownership, also known as a property deed. A property’s ownership rights can belong to a single individual or it can be split between different parties.

When purchasing property as an individual, the property deed will come with your name on it, which means that you are personally liable if any claims are made against the property. This is one of the biggest benefits of an LLC – property purchased on its behalf comes with a property deed under the LLC’s name, protecting your personal assets in a worst-case scenario.

If you want to transfer a property title to your LLC, you will first need to obtain and file a Quit Claim Deed at your local County Clerk’s office. A Quit Claim Deed is a document that lets you edit the information on previous deeds. A real estate lawyer can help you with drafting your Quit Claim Deed.

One last thing: beware of title transfer taxes! These are charges made to transfer the title.

How This Impacts Your Finances

Your financing could be affected if you have an existing mortgage and transfer property to your Florida LLC. For example, if you transfer the title to your LLC when the mortgage is in your own name, then your mortgage note and property deeds won’t match up. When this happens, it can threaten the foreclosure rights of your lender. Be sure to ask your lender if they allow the title transfers to an LLC first! Even if they say yes, they might have certain provisions or requirements that you will want to take into consideration before moving forward, too.

The Steps to Form Your Rental Property LLC

Let’s do a quick break down of the major steps involved with starting a rental property LLC. For a more detailed, step-by-step walkthrough for starting an LLC, check out our guide here.

  1. If you already have a loan for your property under your name, reach out to your lender to see if they permit title transference to your LLC. If they say yes, ask if they have any requirements that must be met before the transfer can take place.
  2. Pick a name for your LLC.
  3. Draft and file your LLC’s Articles of Organization.
  4. Draft an Operating Agreement that clearly defines the rights and responsibilities of members, as well as what to do when there’s a disagreement.
  5. Obtain all the licenses and permits that your business needs to operate legally in the State of Florida. Depending on your industry, you might want to reach out for a lawyer for assistance with compliance.
  6. Transfer the title’s ownership to the LLC by creating a Quit Claim Deed listing you as the Grantor and the LLC as the Grantee. Then, go to your County Clerk’s website and search for filing instructions. There may be a small fee.
  7. Set up your bank account for your LLC so that you can keep your personal and business assets separated.
  8. Update your rental leases to show the LLC as the owner. You should also make sure that, going forward, all rent payments go to the LLC’s bank account and not your own.

Costs of Formation

The exact cost of forming your LLC will depend on your own specific fees. In the Florida, LLCs can be formed for a combined $125 fee for your Registered Agent and to file your Articles of Organization. Optional documents and agreements like Certificates of Status and Operating Agreements can cost you a little extra, though. Remember spending money on a lawyer now can help avoid fees, penalties, and lawsuits down the road. Some things are worth the investment. Your business is one of them.

Ongoing Costs

The amount of capital needed to run a Florida Property Rental LLC depends on factors unique to your business. However, you can expect to fork over about $138.75 along with your Annual Report each year. Just don’t file the Report late – then the fee skyrockets all the way up to $538.75! Your annual franchise tax will run you anywhere between $250 to $800 dollars each year, too.

If you have an existing mortgage, your interest rate might go up after transferring the property title. There are potential tax consequences to look out for, too, depending on the value of the transferred property. This happens when the value of your property has gone up since its acquisition – another good reason to start your LLC before buying up those properties!

Finding the Right Name for Your Rental LLC

When naming your Florida Rental Property LLC, remember to follow all the rules set out by the State of Florida. That means picking something that won’t be confused for an existing business or federal agency, among other requirements.

There’s no need to get fancy with the name here. The majority of landlords opt for the less creative but more utilitarian route of naming their LLC based off the property’s address, such as “123 Fake Street, Springfield LLC.” Street addresses are more or less unique to an area, which makes your LLC easy to identify, easy to register, and easy to find should you ever get lost downtown.

You can conduct a name search through Google or on the Division of Corporation’s website. For more on naming an LLC, hop on over to our blog here.

Is an LLC a Better Choice Than an Umbrella Policy?

An “umbrella policy” is a type of insurance that attempts to reproduce the protections of a Florida Rental Property LLC. They are, however, limited in scope. An umbrella policy covers you in situations where the damages incurred go beyond those covered by your standard insurance policy. For instance, if your insurance covers damages up to $500,00 and you’re sued for twice that amount, your umbrella coverage will help with the balance.

While umbrella policies do offer increased personal asset protection, they are not nearly as comprehensive as an LLC. If you end up paying more than your standard insurance and your umbrella policy is willing to cover, then the remainder can still and likely will be taken from your personal assets.

Looking to start a business or grow your current business? Contact FL Patel Law today by visiting our website or calling 727-279-5037.

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