Creating a Rental Property LLC in Delaware

Benefits of creating a rental property LLC in Delaware

Liability Protection 

If you own your Delaware rental property as an individual and someone files a lawsuit against you, your personal assets are at stake. Forming an LLC for rental property in Delaware transfers the liability to the LLC in most cases. With an LLC, only the assets owned by the company are accessible and not your personal finances. 

Pass-Through Taxation 

As opposed to corporations, which are taxed at both the corporate and shareholder level, limited liability company members are taxed only once. Profits “pass-through” the business to a business owner’s personal income tax return. This avoids double taxation. In other words, with an LLC structure, rental income is taxed only once.

Separation of Assets

It is important to keep your business and personal assets and expenses separate. Tax time is difficult enough as it is. Once you have formed your rental property LLC in Delaware, you can open a separate bank account specifically for anything dealing with your rental properties. 

Series LLC for real estate investors in Delaware

Not all states allow series LLCs, but Delaware does, and this structure is a good option for landlords who own multiple properties. A “series” is a segment of the LLC. It is treated as a separate entity. Each property is a separate series, isolated from the rest. The debts, expenses, liabilities, and obligations of one series can’t be enforced against another in the LLC or against the LLC as a whole. 

What to know before creating a rental property LLC in Delaware

In many cases, using a Delaware LLC for real estate investment is the best business entity option. Limited liability companies are a popular choice for an investment property because they are relatively easy to form and provide protective benefits for members. 

Steps to form an LLC for your Delaware rental property

There are several steps to create a rental property LLC in Delaware, but it is not overly complicated, especially when you allow us to walk through the process with you. Here are the key steps of how to set up a real estate LLC in Delaware.

Step 1: Name the Business

Your first step is to determine the name of your business according to Delaware limited liability company naming laws set forth in the Delaware Business Code. Make sure that no other business is using that name or a similar version of that name. 

Step 2: Appoint a Registered Agent

You will need to appoint a registered agent to receive all legal and business correspondence. Let us help you find one and take that step off your plate. 

Step 3: File a Certificate of Formation

Once you have a registered agent, submit your Certificate of Formation to the Delaware Division of Corporations. This document is what actually causes your business to legally exist in the state. 

Step 4: Create an Operating Agreement 

Your Operating Agreement governs the business structure and dealings of your company. Details include member and manager responsibilities, asset and debt management, dispute resolution, operating procedures, ownership transfers, and more. If there is any sort of controversy, you will look to this document for guidance. The easiest way to complete your Operating Agreement is by using our Operating Agreement template. 

Step 5: Apply for Your EIN 

Apply for your Employer Identification Number (EIN) from the IRS and open financial accounts in the business name. This allows you to keep personal assets and expenses separate from the business. 

Step 6: Inform Relevant Parties and Transfer Property

Once your Delaware LLC is all set up, you can transfer any rental property you currently own into it. You’ll need to draft and file an updated deed showing the LLC as the property owner with the local land records office. And there are taxes you’ll need to pay when transferring Delaware rental properties into your LLC. 

If you have an existing mortgage or loan on the property, inform your lender about the transfer. They will need to update paperwork and potentially change the terms of the agreement. It is a good idea to have a consultation prior to the transfer. 

Inform all tenants of the transfer and update all lease and rental agreements to show the ownership change. 

Who should form a Delaware LLC for their rental property?

Anyone who owns and rents out property can benefit from forming a rental property LLC in Delaware. Whether you have vacation property or residential property, the tax and liability benefits are important to your overall profitability and personal asset protection. 

If you intend to purchase property but have not done so yet, consider forming your Delaware real estate LLC first. Forming your limited liability company first allows you to purchase the property through the company and avoid going through the transfer process later. But you can transfer currently owned property to an LCC, as we explain below.

How We Can Help 

Forming your LLC doesn’t have to be difficult. We are here to help smooth out the process. Once your business has been formed, we can assist in keeping track of all of your other compliance needs. Whether it is filing annual reports, tracking licenses and permits, or making amendments, our tools and services are designed to make owning a business easier, especially as it relates to property management LLCs.