Creating a Rental Property LLC in Alabama

Benefits of creating LLCs for rental properties in Alabama

Forming an LLC for your rental properties can give you financial benefits similar to those of a sole proprietorship. It can also give you legal benefits similar to those of a corporation.

Personal Liability Protection

Whether you’ve lived in a rental property or outright owned your living space, you likely know that things can go wrong. A pipe might burst, lease terms might get breached, or someone might get hurt. If you were a sole proprietor of your rental property business, a tenant could sue you personally for any harm they suffered on your property, for lease disputes, or for many other claims. But if you run your rental as an LLC, you can reduce personally liable if something goes wrong. Similar to corporate disputes, a tenant or other third party usually has to sue the LLC to address their issues.

Pass-Through Taxation

So if LLCs and corporations limit their owners’ liabilities in legal disputes, why not run your investment property as a corporation? The choice is yours, but forming and running a corporation requires you to follow more formalities, and you are subject to double taxation with a corporation. Double taxation means that the standard corporation has to pay taxes on its income, and then its shareholders have to pay income taxes on their distributions from that income. The LLC tax structure is simpler and normally less expensive. The LLC itself doesn’t pay taxes. Rather, each owner pays personal income taxes on their share of distributions from the LLC’s income.

Separation of Business and Personal Property

It’s usually a mistake to mix your business and your personal life, especially when it comes to financial assets. Forming an LLC for your rental properties helps you avoid making that mistake. As we explained above, legal disputes with your LLC normally go straight to the LLC, so they usually won’t affect you personally. Also, if your LLC runs into financial problems, its creditors generally can’t come after your personal assets and must settle their scores with the LLC itself.

Series LLCs and Real Estate Investment in Alabama

You’re probably seeing all the opportunities for growth when running a rental property LLC. You could have multiple properties in different locations, pulling in rental income from many directions and diversifying your portfolio. But what happens if one property runs into legal or financial issues while the others thrive? Do they all fall like dominoes? They don’t have to. To protect each individual property, you can set up a series LLC.

A series LLC separates the multiple assets or properties of an LLC into its own insulated groups. In the context of rental properties, this means that if one property in its own series has a legal or financial issue, a third party can’t sue an LLC property in a separate series to recoup their losses.

What to know before creating a rental property LLC in Alabama

Extra paperwork is normally involved in forming and running your rental property business as an LLC, but it’s often worth the administrative hassle.

How to form an LLC for your Alabama rental property:

Step 1: Choose an Appropriate Name and Obtain a Certificate of Name Reservation

To form an LLC in Alabama, you have to first choose an appropriate name that abides by state law.

Then, you must obtain a Certificate of Name Reservation from the Alabama Secretary of State.

Step 2: File a Certificate of Formation

After reserving your name, you must fill out and file a Certificate of Formation with the Secretary of State.

Step 3: Buy Property in the LLC’s Name or Transfer the Deed

From there, you can either buy property in the LLC’s name or transfer the deed of a property you already own to the LLC. Make sure all of your taxes are paid before you attempt to transfer title via written deed. Deeds transferring title need to be written on paper, signed, and witnessed by two people. Once the deed is properly executed, you file it in the county where the property is.

Many properties also have mortgages. If you’re transferring a mortgaged property to your LLC, you need to change the mortgage paperwork to reflect the correct owners. Also, the terms and rates of the mortgage are likely to change. Additionally, you need to update any lease agreements to reflect changes of ownership. You also need to notify your current tenants about the change.

Who should form an Alabama LLC for their rental property?

It’s a good idea for anyone seeking to run a rental property business to run it as an LLC. As stated above, there are a lot of great protections you can receive through an LLC.

LLCs have the right to own real estate. Because of this characteristic, it’s often easier to form your LLC first and then purchase the property in the LLC’s name. But don’t fret if you’ve already purchased your rental property and you haven’t formed your LLC yet. There’s a little extra work to do, but we can give you information on how to transfer property to your LLC.

How We Can Help

Starting a new business venture can be exciting and a little bit scary. But our services can help quell your fears. With our Alabama LLC Formation service and other formation and state compliance services, we can take a lot of the guesswork out of starting your new business. With our support, you can put more focus into growing your business.