Many hosts start renting out a property simply as a way to earn an extra income or share their city with others. However, what to do if business picks up?
Can you continue as is? Should you start employing staff? And, if so, what business structure should you implement?
One popular option among vacation rental owners is to form an LLC. It can offer personal liability protection as well as tax benefits. Here’s an intro to how this legal business framework works and if it can help you as a property owner.
LLC is short for Limited Liability Company. It’s a type of business structure that basically combines the limited liability of a corporation with the taxation of a sole proprietorship or partnership.
Registering an LLC for your Airbnb business can offer business owners protection and a number of benefits like:
When you run your Airbnb business as an LLC, your personal assets will be kept separate. As the business is viewed as a legal entity on its own, your motor vehicle, family home, and other personal assets will be safe in the event of bankruptcy.
This protection also applies to other liabilities like debt or legal action. In this case, you can enjoy peace of mind knowing that your personal assets won’t be seized by creditors or court orders. Plus, you’ll also not be held personally responsible for debt.
Considering that operating a rental business comes with a fair share of risk, this is an attractive benefit to cash in on. Injuries occur commonly on properties and disputes with neighbors can sometimes turn in the court which means that you’ll want to ensure that you’re adequately protected before you host your first guest.
If you’re a small business owner, starting an LLC for Airbnb rentals can also offer tax advantages.
One benefit is that you can select how your business will get taxed. You can, for example, choose to be taxed as a corporation, sole proprietorship, or partnership.
Another benefit is that you might qualify for pass-through taxation. This means that instead of being taxed on your business profits, you’ll be taxed as an individual owner on the profits using the personal income tax rate. In other words, you’ll declare your business profit as personal income and pay self-employment tax and income taxes.
However, if you want to avoid paying self-employment taxes, you have the option of applying for S corporation status. With this approach, you’ll then pay yourself a reasonable salary. This way, you’ll be able to save money which you can reinvest into your Airbnb rental business.
In addition to offering business owners peace of mind, the LLC structure can also help to put travelers at ease. Those three letters can add a lot of credibility to your name and communicate to guests that the chance that they’ll be scammed is slim.
Not only will you appear more credible in the eyes of your future guests, but financial institutions will also regard you as more trustworthy. This can come in handy if you plan on applying for small business loans at some stage.
By taking the extra step and setting up an LLC, you’re also taking one of the first steps in establishing a brand. This can make it easier to market your Airbnb business.
You can, for example, design your own business website which can help you to attract more direct bookings. This way, you can become less reliant on online travel agencies and platforms like Airbnb, Vrbo, and Booking.com that dictate the rules and take a percentage of your net income.
The following are two of the main cons to consider before you decide on an LLC for Airbnb rentals:
One of the main disadvantages of starting an LLC business is the extra business expenses involved. The filing fee varies from one state to the next and can set you back a couple of hundred dollars.
It can also lead to more admin work, especially if you co-own or employ staff. You’ll, for example, have to figure out the tax rules, seek legal counsel, acquire a business address, and open a separate bank account.
Then, afterwards, it will call for careful bookkeeping to ensure that personal and business expenses remain separate. The same applies to any income.
Depending on the state, the documentation and steps required to form an LLC can vary.
To get set up, the following documentation is generally required:
You’ll also need to:
It’s key that you hire the services of a real estate attorney who can offer legal counsel and shed more light on matters like business licenses, local laws, and how to pay taxes moving forward. In addition to their professional advice, also keep in mind the following three top tips:
Some hosts decide to name their vacation rental property. This is an optional step and is in addition to a business name which is compulsory for registering an LLC.
For example, if you have multiple properties, each property will have different property names, but they’ll all be operated by the same business.
When choosing your business name, try to keep it as unique as possible. Not only should the business name be available, but it should also help you to stand out among other similar businesses.
In addition to being unique, it should also be inviting. After all, you’re operating in the hospitality sector.
Plus, considering that most of your marketing will be online, try to stick to a phrase that’s easy to search. In other words, it can be unique, but the spelling should be standard.
To help you understand whether this formal structure will make the most sense for your Airbnb business, it’s strongly recommended that you first write a business plan. In your business plan, you’ll outline business practices, strategy, frameworks, and objectives, among other things.
In fact, in your business plan, there will be an entire section dedicated to the management structure for your Airbnb business. So, it will be a good exercise helping you to explore the alternative options like registering as a C corporation instead.
Your business plan will also require that you write a financial plan. Writing this section will help you to estimate your taxable income and if it will offer tax benefits.
While you won’t have to worry about personal liability, it’s still crucial to ensure you’re adequately insured. If there’s an accident, your personal assets and bank accounts might be off limits, but you still have a business bank account and business assets to think about.
At the end of the day, the choice to start an LLC for Airbnb properties is a personal matter. If you’re unsure, it’s best to seek professional advice (and should you decide to continue you should definitely enlist professional help).
If you’re renting out only one Airbnb property, the effort and extra expenses might outweigh the benefits. However, if you’re managing multiple vacation rental properties, it starts to make more sense.
The two main considerations are the tax benefits and personal liability protection. It could potentially reduce your overall tax burden, helping you to save money. While that’s not a given, what is guaranteed is the personal asset protection that you’ll enjoy. If the risk is what’s keeping you up at night and preventing you from growing your business, know that there are ways you can reduce this risk, one of which is setting up an LLC.
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