As an AirBnB host, you’re welcoming visitors from around the world into your property for a short-term stay. Most of the time, you can have confidence the people who rent a home or apartment will care for the property thanks to guest reviews and solid rental agreements. But as any veteran landlord knows, an accident or misunderstanding will inevitably happen with a guest of the property. While these situations are rare, having an added layer of protection in addition to tax benefits can help you sleep better at night in addition to retaining more profit through tax savings.
AirBnB hosts should at least consider forming an LLC for their business. This is especially true for owners who have grown the business to multiple rental units. With more units, you’ll generate more revenue, but also take on added risk. In this piece, I lay out the pros, cons, and everything else you need to know about forming an LLC for a short-term rental business so you know what you’re getting into.
Advantages of an LLC
The advantages of an LLC for AirBnB hosting include privacy, personal liability protection, tax benefits and credibility.
Personal Liability Protection
The protection of personal assets is one of the most important reasons to consider an LLC for an AirBnB hosting business. This advantage applies to hosts who simply rent out their own home as well as those who own properties they specifically intend to use for AirBnB hosting.
Assume for this example that a guest falls from the second floor of one of your properties after leaning against a loose balcony railing. If that guest sues you for damages, your personal assets such as your home, car and bank account would be at risk if your business is a general partnership or sole proprietorship. On the other hand, only the business’s assets would be at risk if the AirBnB hosting business was an LLC. Of course, this outcome assumes that your operations and maintenance of the businesses is in compliance with government regulations.
As the owner of a property on AirBnB, you may not want to disclose your name and personal address. If you own the home in your personal name, guests can easily lookup the owner of the property by searching public tax records for example. This can allow any unhappy guests from finding out where you live, which is not always ideal.
An LLC gives you an added layer of privacy because guests will find the LLC company name, instead of your personal name when conducting research on the property. This is another major advantage to form an LLC as a host.
The advantages of an AirBnB hosting business also include tax benefits. LLC owners have two basic options for taxing their business, both of which can save money compared to operating an informal business.
The default option is to tax an LLC as a general partnership in the case of a multi-member LLC or a sole proprietorship for single-member LLCs. This taxation method means that the business itself doesn’t pay taxes. Instead, profits and losses pass through the LLC, and the owners pay taxes on their personal tax returns. An LLC can also be taxed as an S corporation, which is most beneficial when you want to use the tax savings to expand your AirBnB business by buying more properties or making improvements to existing ones.
An LLC structure can improve the credibility of an AirBnB hosting business to customers. An informal business like a sole proprietorship doesn’t have a unique business name since it typically operates under the owner’s personal name. Assume for this example that someone named John Smith operates an AirBnB business as a sole proprietorship.
This issue is less of a problem with AirBnB hosting than other businesses since a customer’s perception of these properties is typically based more on AirBnB than the individual host. Nevertheless, vendors and business clients are more likely to take you seriously if your business has a formal structure like an LLC.
The biggest disadvantages of an LLC are the additional cost and administrative overhead compared to a sole proprietorship. In particular, calculating taxes becomes a bit more complex with an LLC, especially if it has multiple owners. You also need to ensure that your personal accounting records remain separate from your LLC’s finances. Never mix business and personal income when you form an LLC.
An S corporation may have a more favorable taxation than an LLC if you have employees and co-owners. This tax structure can reduce the owners’ self-employment tax by paying them a salary as if they were employees.
This strategy allows owners to only pay self-employment tax on the portion of the business’s income they receive as salary. They can then reinvest the company’s remaining profits back into the business without paying self-employment tax on it.
How to Form an LLC as a AirBnB Host
The details of forming an LLC can vary by state, although the basic steps consist of the following:
- Choosing a name
- Filing the Articles of Organization
- Designating a registered agent
- Creating an operating agreement
1. Choose a name.
The name of the LLC provides your business with its brand and is essential for customer recognition. It will appear on anything, so it’s important to ensure that it will promote your business while still complying with the rules for naming LLC’s. These rules vary between states, but the name generally must be unique and free of profane or vulgar words. Furthermore, it can’t contain words associated with another type of business and can’t imply government affiliation.
LLC name selection is generally on a first-come, first-served basis, meaning another LLC can take the name you selected until the state has officially approved it for your use. However, some states allow you to reserve your name for a nominal fee until you’ve completed the formation of your LLC.
Most states offer an online search of available LLC names from their website, but you can also request a name check by mail. Some business types require an additional check with other government departments such as the US Patent Office, Department of Revenue, Secretary of State or Trademark Commission.
2. File the Articles of Organization.
You’ll need to file the Articles of Organization for your AirBnB hosting business before you can accept reservations, regardless of the state you’re in. State governments use this document to create and maintain critical information about your LLC, including its name, ownership, purpose, and contact information. The specific information that the Articles of Organization must include varies considerably between states.
Established business owners typically hand the Articles of Organization to their existing business attorney, who should have detailed knowledge of the procedures for creating an LLC.
Entrepreneurs starting their first business are more likely to hire an LLC formation service, which can submit the Articles of Organization to the state. These services can also handle other business documents such as annual reports and franchise taxes, and typically cost much less than an attorney.
The filing fee for an LLC’s Articles of Organization is entirely dependent upon the state. Many states charge as little as $50, although this fee can be as high as $500.
3. Designate a registered agent.
A registered agent is an LLC’s point of contact for all legal matters and is required in all 50 states. This entity receives documents from the state, such as compliance filing reminders and tax forms, which are often very time sensitive. The registered agent then promptly forwards these documents to the business owner, which is particularly important for lawsuits against your company. Options for a registered agent include the business owner, accountant or attorney, or a registered agent service.
It’s possible to be the registered agent for your own LLC, although it isn’t recommended. This option does have the advantage of saving money if you already plan to be available for business calls during the day, although the disadvantages of this option tend to outweigh the advantages. For example, a registered agent must always be available during standard business hours, which would prevent you from taking vacations or sick days. In addition, it also raises the possibility of being served with a lawsuit in your own place of business.
Lawyer or Accountant
An existing lawyer or accountant can be a good choice for the registered agent of your LLC. This option assumes you’re already paying such professionals for their services, meaning that adding them as your registered agent won’t increase your costs by much.
However, specifically hiring a lawyer or accountant to be your registered agent will usually be very expensive. We’re talking thousands of dollars instead of a few hundred. Furthermore, these professionals often have little experience in serving as a registered agent, which can often be handled for under $300 with a LLC service company.
Registered Agent Service
Most AirBnB hosts will opt for a professional registered agent service, mainly because they’re cheaper than hiring your own attorney or accountant. Furthermore, this service won’t hinder expansion plans because most of these companies have offices in all 50 states.
They also specialize in this field, so they’re likely to be highly knowledgeable about a registered agent’s responsibility. Choosing the best service for your needs is often the biggest challenge for this option. It’s a good idea to research many review sites for registered agents to ensure you understand the differences between them. If you file your LLC through IncFile, you’ll get the first year of registered agent services for free.
4. Create an operating agreement.
The operating agreement establishes guidelines for how you plan to run the company. It typically includes the following:
- Identifying information
- Statement of intent
- Business purpose
- Tax treatment
- Admission of new members
The LLC’s identifying information includes its name, and addresses of its principal business office and initial registered office.
The statement of intent ensures that the operating agreement is in accordance with the laws of your state. It also describes when the business will come into existence, which is usually after the required documentation has been filed with the state.
The business purpose of the LLC describes the nature of the business. It should also contain a proviso like “and for any other lawful business purpose,” so you can expand into other areas without needing to write a new operating agreement.
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The term describes the conditions for terminating the LLC. The term clause for an AirBnB hosting business will typically say that it will continue until dissolved according to state law. However, LLCs created for a specific purpose may be dissolved after a specific period of time or when a certain event occurs.
The LLC’s tax treatment describes how its taxes will be calculated. Standard options include taxing it as a sole proprietorship, partnership or corporation.
The clause for the admission of new members indicates how to acquire an interest in the LLC. This clause is necessary if you want to add a partner without preparing a new operating agreement.
Filing an operating agreement for an LLC is only necessary in five states, including California, Delaware, Maine, Missouri, and New York. Furthermore, all of these states except New York allow oral operating agreement. Despite the lack of a legal requirement, you should still maintain an operating agreement since they can save you a good deal of trouble in the future.
Three states require business owners to publish a notification of their LLC’s formation in newspapers, including Arizona, Nebraska and New York.
Section 29-3201 of the Arizona Revised Statutes describes the requirements for notification of LLCs in that state. The owner must publish notice of the LLC’s formation in a newspaper for three consecutive runs, which generally means one ad per week for three weeks. The Arizona Corporation commission (AZCC) will send you a Notice for Publication form after it approves your LLC’s application which you’ll fill out and send to a newspaper with a circulation in the count of your statutory agent.
Nebraska Revised Statute 21-193 requires all LLCs in Nebraska to publish a Notice of Organization in a newspaper with a circulation that includes the LLCs designated office. The ads must run for three consecutive weeks, after which the newspaper will send you an Affidavit of Publication. Keep the original for your own records and mail a copy to the Nebraska Secretary of State.
Section 206 of the New York LLC Act regulates publication requirements in that state. The publication notification must run in two newspapers for six consecutive weeks, with one newspaper having a daily circulation and the other having a weekly circulation. Once the runs are finished, the newspapers will send you an Affidavit of Publication, but you must file with the state along with a $50 filing fee. All of these steps must be completed within 120 days of the LLC’s formation.
How much does an LLC cost for an AirBnB host business?
An LLC formation company performs a variety of services for LLCs. It can handle its Articles of Organization in addition to maintenance responsibilities like serving as a registered agent. The fees for LLC formation services vary considerably, depending on the specific company and the services in the package you select. Popular LLC formation services include ZenBusiness, IncFile and Northwest.
The basic package From ZenBusiness costs $39 and provides the best combination of features and value. It has a high percentage of positive reviews and has helped form thousands of LLCs. This service also has additional packages that provide more services.
IncFile ‘s basic service is free, fast and reliable. It includes the year of registered agent service and has highly rated customer support. IncFile also has many positive customer reviews.
Northwest Registered Agent charges $225 for its LLC formation services, which include registered agent services for one year. The main reason for its higher price is that it scans every document it receives as your registered agent, whereas most competitors only scan documents if they’re legally required to do so. Northwest also provides customer support that’s more personalized than other LLC formation services.
Licenses, Permits and Protection
Many jurisdictions require an AirBnB hosting business to obtain a license for short-term property rentals. The property may also need to be zoned for this type of business, and most businesses need to collect sales taxes on the products and services they provide.
Sales tax varies by location and may include taxes from more than one jurisdiction. An AirBnB business will also require general liability insurance at a minimum and may also need commercial property insurance.
Frequently Asked Questions
Is LLC a good option for an AirBnB hosting business?
An LLC is a good option for an AirBnB business because it provides the personal liability protection this type of business needs. This business structure is also relatively inexpensive to obtain and maintain.
What is an LLC?
A limited liability company (LLC) is a legal entity that’s taxed similarly to general partnerships and sole proprietorships. That means the owner declares the LLC’s profits and losses on their personal tax returns, so the LLC doesn’t pay taxes itself.
An LLC also shares similarities with corporations, including similar taxation in rare cases. A business owner is not typically personally responsible for an LLC’s financial obligations, meaning their personal assets aren’t at risk if someone’s sues the LLC.
What are the disadvantages of an LLC for an AirBnB hosting business?
The biggest disadvantage of using an LLC for an AirBnB business is the greater complexity of filing taxes, especially when the business has multiple owners. It’s important to keep the owners’ personal finances separate from business’ finances as much is possible. For example, an LLC should have its own bank account.
Do you need an LLC for an AirBnB hosting business?
Running an AirBnB business as an LLC isn’t legally required, but it strongly recommended due to the potential liability of allowing guests to stay on your property. The risk of a lawsuit that could endanger your personal assets is too great to ignore by continuing to operate as a sole proprietorship or general partnership.
AirBnB Hosting Sole Proprietorship vs. LLC
The main difference between a sole proprietorship and an LLC is that a sole proprietorship doesn’t offer limited liability protection. Furthermore, a sole proprietorship only taxes revenue as personal income, whereas an LLC has multiple taxing options.
AirBnB Hosting LLC vs. Corporation
A corporation is subject to double taxation and is more complex to manage than an LLC. A small AirBnB business generally won’t profit from this tax structure until it needs outside investors.
Form an LLC Now
Ready to form your LLC? You can usually file for all the documentation in your state in less than 30 minutes with help from an LLC service that helps guide you through the process.
- IncFile Review: This is a low-cost service where you can file for an LLC for free (plus normal state fees). This company has helped more than half a million companies form an LLC. While the price is right there’s limited support with this service if you require some hand holding.
- Northwest Registered Agent: This is the top rated service we’ve reviewed with a score of 34 out of 40, but it’s also an expensive option than many alternatives. If you need help from a human this is the best option… just know you’re paying a bit more for the support.
Alternatively, you can work with a business lawyer (expensive option) or file for the business through your state website (can be more complex if you don’t have legal experience). At the end of the day with a business like hosting, we recommend protecting your personal assets by forming an LLC somewhere. The benefits are worth the modest investment and the fees are tax deductible as a business expense.