01 Jan If I start an Airbnb business, should I start an LLC first?

Q. I am thinking about starting an Airbnb business with a house I’ve been eyeing. Should I start up an LLC first? And then link the house to the LLC? I’m told banks will not lend money to LLCs and I would need to buy the house first under my name.
— Investor, soon

A. This is an exciting way to start the new year.

There is a lot to consider.

First, on LLCs, or Limited Liability Companies, which are a common and relatively easy way to start a business.

The main benefit of an LLC is that it limits the personal liability of the business owner or owners from business losses or risks, said Deva Panambur, a fee-only planner with Sarsi, LLC in West New York.

This contrasts with sole proprietorships or partnerships, which could expose the owners to unlimited liability, he said.

“However, the limited liability of an LLC is not a guarantee, and you will want to consult a qualified lawyer to understand the nuances of this topic as it pertains to you,” he said.

Another benefit of an LLC is that it offers a flexible and simple way to manage business taxes, Panambur said.

He said depending on the elections made by the LLC and the number of members, it is treated either as a corporation, partnership or as part of the owner’s tax return — a disregarded entity in the case of single member LLCs.

In most cases, an LLC is a passthrough entity, meaning it passes all its income on to the owners or investors of the business, he said.

He said some tax elections for an LLC will lead to lower taxes. For example, an LLC that is taxed as an S corporation could reduce self-employment taxes for the owners.

“Real estate income can be taxed in more than one way depending on how you run the business, your qualifications and your income,” Panambur said. “You will want to consider several factors such as the nature of the business, business plan, level of income and taxes, number of employees or partners if any to suitably structure your business and make appropriate elections for tax purposes.”

Banks and lenders will lend money to you or your LLC depending on their evaluation of the business prospects and credit risks, he said, but creating an LLC does not necessarily improve the chances of getting a loan.

“It helps If the borrowing is collateralized by property, such as a house, but the lender will still go through the credit evaluation process,” he said. “Every lender has its own policies so if you plan to first buy the home in your name and then transfer it to an LLC you will want to check with the lender first to ensure that it goes through smoothly.”

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This story was originally published in January 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.