The Hidden Costs of an LLC for Your Minnesota Rental Property

Everyone talks about the benefits of an LLC for your rental property, but almost nobody talks about the hidden costs. A lot of people expect the LLC is going to be the end-all, be-all. It's easy protection for your property, it's got to be the way to go.

The reality is, LLCs come with ongoing costs. They come with paperwork, and there can be a little bit of complexity as well, depending on how you set it up. The first thing to consider is the setup and the annual fees for your LLC. There are filing fees, there can be state fees, and there are annual renewals. Your filing fees are going to vary depending upon what state you're in.

You need to be careful, because in a state like New York, when you file for your LLC, you then need to actually publish a notice that the LLC has been filed. And if you do it in New York City, that publication requirement can be over $3,000 in many of the newspapers you use. So you want to make sure you understand where you're going to be publishing, and factor in that cost, because that's a big bill you can get hit with.

You also need to look at the state fees: the ongoing annual registrations and state fees involved with your LLC. If you're in Minnesota, we can do an annual registration that doesn't cost you anything, but many other states actually have an annual renewal fee. It can be about $125 up to $400 or $500. So make sure you understand what those annual fees are in your state.

Depending upon the type of business you have, and the structure in your state, you may also have franchise fees or a minimum annual tax that you must pay just to have an LLC at all. So these are all things we have to consider on whether it makes sense for you to set up that LLC. If you have a rental property LLC and you're running on bare margins, and it's not really making any money, some of these fees could actually tip the balance and make you think maybe I don't need that LLC.

Beyond the setup and the annual fees, we also have to consider accounting and administrative burdens.

You're going to need a separate bank account for your LLC. After it's been set up and filed, you're going to go to the government and get an EIN, which is like a Social Security number for your business. You then take that number to the bank and create a bank account for your new LLC.

Depending on your familiarity with finances, you'll probably need to hire a bookkeeper to help you with all the expenses and ongoing finances that surround your new LLC, especially with a rental property. We've got rent coming in and property taxes going out. There are a variety of things we need to balance out on a yearly basis.

If you've been doing your taxes yourself, you'll now find the money coming in from the rental property is no longer going to show up on your personal taxes. That LLC you've formed is going to have to file its own tax returns as well. Maybe you haven't done this before, maybe it's something you're not interested in. You need to consider whether it's time to bring in an accountant to help you with those accounting filings.

There can also be more paperwork that you need to keep up to date to maintain your protection.

When you set up that LLC, after we've started up, we've got the EIN, we've got the filing with the state, the next thing we need to make sure we're doing is that operating agreement, your foundational legal documents, to make sure the state knows this is a valid company. So if you end up in a lawsuit down the road and the judge says, "Is this really an LLC, or just a way you're trying to avoid liability?" you can say, "Judge, I've got an operating agreement. Here are my annual minutes, here are the corporate resolutions, here are all my corporate documents. It's clearly a legitimate business."

But without those, you run the risk of the court actually blowing up your liability protection. We call it piercing the corporate veil. So we want to make sure we get that paperwork taken care of

as we get our LLC formed. If you're using the LLC in the real estate context and you're going to take on financing for your property, one thing you have to understand is, if you set up an LLC, you're not immediately going to get very favorable terms when you go to look for financing or a loan for the property. Your new LLC has no history, it has no credit report, and it has no basis to give you a good interest rate for any kind of loan you would be taking. Down the road, if you have 15 or 20 years of financing, definitely reach out to a mortgage broker, and at that point you may get a much better deal. But as you're starting out, your loan rates may be much higher if you try to take them directly through the LLC.

And even if the lender will let you do it, they will often require you to sign a personal guarantee, meaning that if the LLC defaults on that loan, you're going to be personally liable. I often tell people we want to avoid these personal guarantees wherever we can. The reality is, if you need to buy the property, and that's the core of the business you're going into, you may have to take on a personal guarantee. You just might not have other options. And then down the road, refinancing may be tougher as well. So this is where it becomes very important, very important, to work with a qualified mortgage broker, a qualified mortgage professional who can help you find the right loan product for you, especially if it's your first time getting into real estate investment.

Another thing we need to watch out for is what I call tax surprises. If you've created your LLC, you're going to have different tax treatment. It's not going to just show up on your personal tax return, and you're going to have to consider whether or not you need to do an S corp election. It's not something you need to do, but it's something that can benefit your LLC.

What we want to do in that case is work with your accountant. And if you don't have one, it's a great time to reach out and speak to one. They can usually give you a feel for what income level or what financing level really says, "Okay, this company is ready to take on that S corp election, and it will be beneficial." Oftentimes it's not going to be beneficial when you just start the company out, but down the road, as you're making more money, that S corp election can make a lot of sense.

You also have to remember that if you're filing taxes, you may have quarterly taxes, a very different structure than you have on your personal tax returns. If you've worked a W-2 job your entire life, for big companies, the structure you're going to run into on the tax side of things is completely different. So it really makes sense to make sure you've connected with an accountant to understand what is going to happen, and make sure there are no tax surprises waiting for you.

One of the common questions I get from people is, "If I don't do an LLC, how can I protect myself when it comes to this property?" Probably the most important thing we can do is make sure we have enough insurance on the property. But

if we've chosen to go down that road, and we've opened the LLC and moved the property, we need to make sure the insurance policies have also been updated. You don't want to create a gap in coverage, because when we have those gaps in coverage, you can lose the benefit of the insurance. You've lost your liability protection, and you may have had insurance that would have been on the hook for any kind of payment, and that's now going to be absent because you didn't have the right insured, or maybe you didn't have the right properties listed on your insurance. The LLC needs to be a party to that. And just like with the mortgage broker, just like with the accountant, this is where a professional insurance broker can help you out, to make sure you have the right coverage.

Because what we're looking at here is really not "Is an LLC a good idea?" It's whether the protection justifies the cost for your situation. If you have more questions and want to discuss your situation further, you can head over to my website, AndrewMAyers.com. There's a red Legal Strategy Session button on the front page. Click it, and you'll be taken to my scheduling page. We can set up a 15 or 20 minute phone call to go over where you are in the process and whether an LLC makes sense for you.

If you liked this video, you can hit the like or thumbs-up button below. You can also subscribe on YouTube or at AyersLawTV.com for future episodes. And please remember that an LLC can absolutely be worth it, but only when you understand the full cost of maintaining it correctly.