Should I Form a Business Entity-LLC, S-Corporation, or Can I Opt for Sole Proprietorship? ~ Join Southern
When choosing how to structure your investment property, should you form a business entity-LLC, S-corporation, or can you opt for sole proprietorship? Deciding on an ownership structure for your investment property is a valid concern when considering your purchase.
There are advantages to both an LLC ownership and ownership as a sole proprietor. If you choose to setup an LLC for the purchase it does provide a layer of liability protection to you personally if something were to happen to a tenant who is occupying your rental property. It’s important to note that unless you file otherwise, your business will be structured as sole proprietorship. If you opt for a “doing business as” (DBA) legal name for your investment property, in Florida, you are required to register your DBA name before you can begin using it. DBA and sole proprietorship are not the same thing, so be sure not to conflate the two!
Setting up an LLC varies by state, but it will cost more money to setup the entity. If you are taking out a loan to purchase your property, it could mean a commercial loan instead of a personal loan which could be harder to obtain with a higher interest rate. If you choose the sole proprietor ownership route, then you would not have to go through the time or expense in setting up the entity.
Another option is to include the rental property on your personal income tax return on a scheduled E-form, and you could get a residential loan which could have a better interest rate than a commercial loan. However, the disadvantage is that since the property in in your personal name and an accident happens to a guest they could go after your other personal assets. In either case an umbrella liability package can provide more protection for you.
So, to narrow it down, the financially safest ownership is going through and forming an LLC for the property purchase. If you do choose to own as a sole proprietor, make sure you have an umbrella liability policy to protect yourself for a worst-case scenario.
Please consult with your tax preparer or a real estate attorney before making you decision as well since state laws can be different. This blog is not intended to serve as legal or financial advice.