Vacation Rental LLC Considerations

It doesn’t matter if you operate a single Airbnb property or a growing portfolio of short term rentals. Setting up an Airbnb LLC might be the smartest thing you do all year. Here’s why…

An Airbnb LLC can deliver significant benefits including:

  • Pass-through tax treatment
  • Liability and asset protection
  • Increased banking legitimacy
  • Business credit card rewards
  • A more serious and organized attitude

LLCs Taxed Like Sole Proprietorships

In terms of tax treatment, a vacation rental LLC is indistinguishable from the same property operated as a sole proprietorship. Simply put, you won’t pay more (or less) in income taxes just because you’ve set up an LLC. What you will pay with an Airbnb LLC are annual filing and/or registration fees that vary considerably across states.

In Wyoming, the annual LLC fee is $50, while in California it’s $800. Most other states are somewhere in between. If you live in California and/or your property is located in California, and you want the liability protection of an LLC, there is no way around this fee.

The bottom line is that even $800 a year is a relatively small price to pay for the considerable amount of “insurance” provided by an LLC entity.

LLCs Pay Lower Taxes Than Corporations

This one isn’t really a benefit, it’s more of a non-issue or a reason why an LLC may be preferable to a corporation. Not that you were actually considering setting up a corporation. In any event, single-member LLCs are treated as pass-through entities by the IRS so there’s no extra federal income taxation at the entity level, like there is with shareholder corporations.

Multi-member LLCs are treated like partnerships, which also allow income and expenses to be passed through to the owners and claimed on their personal tax returns. As mentioned above, you will incur some level of annual fees to register and maintain your LLC in good standing.

An Airbnb LLC Protects Personal Assets

This is widely regarded as the single biggest benefit of using an LLC to operate an Airbnb, long-term rental, or virtually any other type of rental property. If a guest slips and falls on your property or scalds themselves in the shower or manages to hurt themselves in any of more than a thousand other ways, there’s a decent chance they’ll find a way to claim it was due to a dangerous condition on the premises.

If the property is properly owned and operated as an LLC, then the plaintiff can only go after assets held inside the LLC, which generally means the property itself and cash held in LLC bank accounts. Personal assets like cars, jewelry, cash, and even real estate owned in other LLCs remain shielded from liability claims. Importantly, the presence of the LLC alone will sometimes be enough to dissuade potential plaintiffs (and their lawyers) from filing a claim in the first place. That can save you an untold number of hours, money, and peace of mind.

While it’s absolutely true that Airbnb provides a certain amount of liability protection with each booking, it may not always be enough to cover certain claims. The terms of VRBO and other booking sites’ insurance policies differ considerably and you may someday decide to take direct bookings (if you don’t already). Either way, it can be reassuring to know that you have an LLC in place as a hard backstop should something catastrophic happen at your property.

As Airbnb hosts, we all know that anything and everything that can happen in the real world also occurs at short term rental properties. When an untimely death occurs on the premises of a vacation rental property, lawsuits involving claims well in excess of $1 million typically follow. While you can’t control every Airbnb guest’s actions, setting up an LLC can help you manage your financial exposure to bad actors.

LLCs Enhance Banking Legitimacy

While sole proprietor’s can indeed open bank accounts with their DBA trade name, our experience is that you’re often taken less seriously than when armed with a formal LLC. When you walk into a bank branch with your LLC articles of incorporation and a federal EIN from the IRS, it’s immediately assumed that your business is legitimate and ready for prime time. This can sometimes open up a more rewarding business banking relationship including no fee checking accounts and access to lines of credit, among other goodies.

Maintaining a separate bank account for your LLC is essential. Courts won’t hesitate to pierce the liability veil of an LLC if the owner shows a pattern of commingling business and personal funds or it’s otherwise unclear where the business ends and the individual begins. Regardless of which type of entity you choose to form, it’s simply best practice to separate your business transactions from your personal income and spending. The best way to do that is with a dedicated business bank account, and possibly a separate LLC credit card as well.

LLC Business Credit Card = More Rewards

Getting a separate business credit card is a fringe benefit of owning and operating a successful Airbnb. You’ll have supplies to replenish, vendors to pay, and any number of other expenses to take care of during the year. Why not earn 1-2% back in cash or points on all your business spending?

With your LLC in place and a federal EIN from the IRS, it’s relatively easy to apply for a separate business credit card. Of course you’ll have to guarantee the debt personally, but most credit card issuers will still reward a separate sign-up bonus even if you’ve already received one recently for a personal card from the same issuer. Some business credit cards even pay double or triple rewards on key business spending categories like advertising, which can pay off if you’re spending money to promote your Airbnb on social media or paid listing sites.

You’ll Probably Become More Organized

The fact is that your LLC entity will make you seem more organized to outsiders, which tends to become your own personal reality over time. Everyone from contractors to mortgage brokers will take you more seriously, which serves to reinforce your own impression of your short term rental business.

It’s also true that when you open a separate bank account for each property (or a portfolio of properties), you’ll save yourself a ton of time over the long run as it makes it far easier to track property income and expenses. Establishing one or more LLCs for your vacation rentals makes it easier to put those systems into place and then follow them religiously throughout the year.

You’ll Take Your Airbnb Business More Seriously

More than just getting organized, setting up an LLC is a strong signal to yourself that you’re serious about building a real business. Don’t underestimate the psychological benefits of thinking of your Airbnb as a business unto itself. Setting up an LLC can help create the mental space necessary for sound business decisions that sometimes elude more casual hosts, like increasing rates during popular annual events and letting go of an unreliable cleaning service sooner rather than later.

You Must Own & Operate as the LLC

Finally, keep in mind that when it comes to LLCs and the protection they provide, how you operate on a day-to-day basis makes all the difference. This important nuance often trips up newbie LLC owners. It’s not enough to merely establish an LLC, pay the annual fees, and assume you’re protected. In order to maintain your liability shield in court, you’ll likely be required to show:

  • The LLC owns and manages the property
  • The LLC collects the income
  • The LLC pays the mortgage and/or other expenses

Learn more about how to optimize your Airbnb…
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