If you operate an Airbnb, you may wonder if you should and how to structure your business. The choice you make can impact how you operate your business, your taxes, and your personal liability protection.
A popular business entity among small business owners is a limited liability company (LLC).
In this article, we cover some of the main advantages, disadvantages, and considerations for creating an LLC for your Airbnb business.
What is an LLC?
An LLC is a business structure that combines the flexibility of a partnership with the asset protection of a corporation.
Unlike a sole proprietorship or partnership, an LLC is a separate entity from its owner(s). In most cases, this protects you, the owner, from the debts and liabilities of the business. For instance, if your business is sued or you can’t repay a mortgage loan, your personal assets are not at risk.
Another characteristic of an LLC is pass-through taxation. The profits and losses of an LLC are passed through to you personally and are not subject to corporate taxes.
However, as an owner of an LLC, you are still considered self-employed and must make self-employment tax contributions, including Medicare and Social Security.
LLC advantages
There are several advantages to forming an LLC for your Airbnb business.
Limited liability
One key aspect of LLCs is "limited liability," which shields owners from being personally responsible for the business's debts and legal issues. In simple terms, if the business can't pay its bills, creditors can't go after the personal belongings of the LLC owners like their home or car. Only the assets of the LLC itself can be used to settle business debts, so you only risk losing the money you've put into the business.
Pass-through taxation
A limited liability company operates as a "pass-through" for taxes. This means that any profits, losses, income, deductions, credits, and other tax-related matters of the LLC are passed on directly to its owners, known as members. Members then report their portion of these tax items on their personal income tax returns and pay taxes based on individual tax rates.
Flexible management structure
In an LLC, owners have flexibility in how they manage the business. By default, state law grants control to members. However, the LLC can choose to have managers control the business instead, as outlined in its operating agreement or Articles of Organization. These managers can be members or outsiders, depending on what's agreed upon. This versatility makes the LLC suitable for both small groups of owners running a business together and larger ventures with multiple owners.
LLC disadvantages and considerations
The following LLC disadvantages and considerations are important to note when forming an LLC for your Airbnb.
Entity costs and obligations
LLCs must meet specific fees and regulations. These include fees for forming the LLC, a registered agent, and ongoing costs like annual reports and franchise taxes. These requirements apply to all states where the LLC operates, and expenses can add up fast.
Failing to keep up with these obligations can lead to the LLC losing its right to operate as a legal entity and losing benefits like limited liability.
The LLC might also have to submit a report on Beneficial Ownership Information (BOI) to the U.S. Department of Treasury's Financial Crimes Enforcement Network (FinCEN), unless exempt.
Self-employment taxes
Members of an LLC must pay taxes for Medicare and Social Security, just like self-employed individuals. This means that the business's profits are subject to these taxes. To potentially reduce this tax burden, the LLC can opt to be taxed as a corporation instead, depending on its revenue and tax situation. It's best to talk to an accountant before deciding on this.
Financing difficulties
Securing a mortgage for a residential property under an LLC isn’t easy. Lenders usually see an LLC as a separate legal entity, separate from its owners (members), which shields them from personal responsibility for the company's dealings. When seeking a mortgage, lenders assess an LLC as a business entity rather than an individual borrower.
As a result, they closely examine the LLC's credit history, financial performance, and how it operates as a business.
Frequently asked questions for using an LLC
What’s the difference between an LLC vs. S corp.?
LLCs and S corporations both offer owners limited personal liability and pass-through taxation. The difference lies in their complexity and cost. LLCs are simpler, more flexible, and cheaper compared to corporations. On the other hand, S corps require a board and extensive documentation, making them more expensive to establish and maintain. For more information, see S corporation vs LLC.
How should you name your Airbnb LLC?
Remember to follow state guidelines when choosing an LLC name:
- Your chosen name should be distinct from other LLCs and businesses registered with the Secretary of State or equivalent authority.
- Each state has specific regulations dictating which words are required or prohibited in LLC names.
Also follow common sense marketing guidelines:
- Select a name that is concise, straightforward, and easy to recall.
- Incorporate a hook that highlights your property’s unique attributes such as location or property type.
- Showcase the distinctive features of your property, such as location, type, or ambiance.
- Take inspiration from other Airbnb listings to spark ideas.
For more information, see
How do you form an LLC for an Airbnb?
To form an LLC for an Airbnb you must file Articles of Organization with the state you selected as your formation state. The exact steps vary by state. For more information on LLCs, see How to form an LLC.
Ready to form an LLC for your Airbnb business?
BizFilings can help you create your LLC online in three easy steps. We’ve helped over 500,000 companies start an LLC. We guide you through the steps and make sure the process is done right. But we don’t stop there, our experienced team, comprehensive services, and exceptional value is with you through the life of your business, whatever your LLC needs. Learn more.
