Creating a Rental Property LLC in South Dakota

Benefits of creating a rental property LLC in South Dakota

Personal Liability Protections

There are three key benefits to creating a rental property LLC in South Dakota. For one, LLCs shield their owners (sometimes also called members) from personal liability. While this may not sound critical, the truth is that all businesses come with risks. Consequently, it’s important to use a business entity type that protects you from both expected and unexpected risks. 

Pass-Through Taxes

The second benefit of LLCs relates to taxes. Most business entities, including corporations and sole proprietorships, pay taxes on their revenue twice. The first tax event occurs when the business itself pays state corporate taxes. The second tax event occurs when the business’s owners pay personal income taxes. LLCs offer “pass-through taxation,” which means that LLC owners pay tax only one time, at the personal level.

Separation of Personal and Business Property

The final benefit of LLCs is that they allow a clear separation between the property of the LLC’s owners and the property of the business itself. This separation of business and personal property provides a critical layer of legal and financial protection for LLC owners. 

Series LLCs in South Dakota

In 2020, South Dakota’s law was updated to provide for series LLCs. Series LLCs allow real estate investors to divide the assets and liabilities of one business entity into different sub-groups. These sub-groups are referred to as “series.” Each series is essentially a distinct entity from the other series. This means it has its own name, assets, bank account, and liabilities. The greatest benefit of a series LLC is that it insulates each series from the liability of all the other series. Practically speaking, a series LLC structure is ideal for real estate owners who intend to rent out multiple rental properties in different locations. 

What to know before creating a rental property LLC in South Dakota

There are quite a few benefits to setting up an LLC for rental property.

How to form an LLC for your South Dakota rental property

You’re now prepared to form an LLC for rental property in South Dakota. The easiest way to actually form the LLC is with our South Dakota LLC formation service. Our formation services make the whole process a breeze, allowing you to focus on more important aspects of your new business. The steps are:

Step 1: Form Your LLC

1. Name your South Dakota LLC
2. Appoint a registered agent in South Dakota
3. File South Dakota Certificate of Formation
4. Create a South Dakota Operating Agreement
5. Apply for an EIN

Step 2: Transfer Your Property to Your LLC

There are a few extra steps to complete if you bought your rental property before you created the LLC. First, draft a deed that shows the LLC as the property owner. Then, file the updated deed with your local land records office. Also, make sure you pay all applicable title transfer taxes.

Step 3: Notify Your Lender

Next, if you previously arranged financing for the rental property, notify the lender of the change in ownership. Transferring the property to the LLC may disrupt or even cancel your financing arrangement. Even if that does not occur, you should expect your mortgage company to ask you to complete additional paperwork. 

Step 4: Notify Your Tenants

Lastly, notify all tenants or renters of the ownership change. Update any and all leases and rental agreements so that they show the LLC as the property owner. 

Who should form a South Dakota LLC for their rental property?

Because of the separation of owners’ personal assets from the LLC’s business assets, all property owners might benefit by forming a South Dakota real estate LLC. That said, creating a South Dakota real estate LLC is most useful for property managers who wish to expand their rental business to include multiple rental units. 

Once you have decided to establish a rental property LLC in South Dakota, make sure that you actually form the property management company before acquiring an investment property. Forming the LLC first will save you from having to do extra work. For one, forming the LLC first means that you can acquire rental properties as the LLC. This saves you the hassle of having to transfer the property from yourself to the LLC at a later time. It also allows you to take advantage of better financing interest rates and payment terms. 

If you already have rental properties but have not created the LLC, you’ll have extra work to get the property into the LLC. First, you’ll have to formally transfer the properties from yourself to the LLC. To transfer the property, you will need to file an updated deed with your local land records office. When you transfer the properties, you may trigger a taxable event, making next year’s tax report more complicated. Moreover, if you have a mortgage or other financing arrangement on the properties that you intend to transfer, understand that the change in ownership might disrupt your current financing terms.  

How We Can Help

No matter what stage your business is at, we’ve got resources for your needs. Maybe you want to streamline property management, form a real estate property LLC, or stay in compliance with state laws. Whatever your situation, we can help take your business to the next level. From forming a Business Plan to providing help with Worry-Free Compliance, we can give your business the boost it needs.