Your occupancy rates are higher than ever and your nightly prices are ideal. You’re getting consistently booked by ideal guests who leave raving reviews of your properties. It’s time to scale your Airbnb business. But for many, the next question that comes up is whether you should incorporate your rental property.
If you want to make everything a little more official, this may be a good idea. Among the S-Corp, LLC, sole proprietorship and other business structures available to you, it’s hard to know what to do.
Here’s my take on whether you should incorporate your rental property. Please understand that this page is general, not comprehensive, and is not legal advice.
Please note, I’m not a lawyer and more importantly, I’m not your lawyer. My main advice is that if this is something you’re seriously thinking about, you talk to a licensed professional about it.
Why incorporate your rental property?
In short, it depends on what you’re trying to do with your Airbnb business. The main reason you’d incorporate your rental property is if you plan to make a long-term business out of it. If you’re just trying to make some extra side income, you probably don’t need it much.
The main reason you should incorporate your rental property is to protect themselves from liability. Meaning, if you get sued because of something that happened at your Airbnb property, your business, not you gets in trouble. That means you get to keep your house, car, and whatever else isn’t related to your business.
There are a plethora of things that could happen during operations: Injured guests, damage to your or neighboring properties and more. A lot of people would rather be protected from that.
Another advantage of incorporating your rental property is tax flexibility. When you incorporate your business, you can choose from different options on how you like to be taxed.
Disadvantages of incorporating your Airbnb business
Not everyone is fully convinced of the benefits of forming an LLC for your Airbnb business. First off, it costs anywhere from $40 to $2,000 to form an LLC, and annual fees range from $0 to $800, depending on where you are.
You need to do social accounting and in most cases, you’ll need to hire an accountant. Airbnb would need to pay the money directly into your LLC account, not your personal one, and then you’ll pay yourself a salary from there.
On top of that, as soon as the property is owned by a business entity, your short-term rental business will be bound by the business rules set in your state. In this case, the local government will likely be bound to treat your rental with the same criteria as other B&B’s — meaning licensing, inspections, and more.
Another drawback is that the process is sometimes complicated and some involve a ton of paperwork. In this aspect, LLCs are far simpler than S-Corps.
In the end, the regulations differ by state, and you’ll have to look into where it could best benefit you or not.
If it’s just a side hustle, you don’t need to go through all the steps to do this. It’s not just owning the LLC — it’s maintaining it and filing the right taxes for it. But if you’re a growing business and especially if you’re managing other people’s properties, you should.
The corporation should own your rental property
Again, I’m not a lawyer, but from what I understand if you are the owner of the property while the LLC just runs the business there, you could still be liable in a lawsuit regarding the property.
If somebody gets hurt on your property, they most likely won’t opt to sue an asset-less LLC while a person owns the property. So it’s important to not only have the LLC manage the rental aspects of your Airbnb business but also be the actual owner of the property.
Sole proprietorship
A sole proprietorship is “a business that legally has no separate existence from its owner. Income and losses are taxed on the individual’s personal income tax return.” If you don’t have an LLC or an S-Corp, this is what you have.
A sole proprietorship is not considered a legal entity. It’s just you, running a business. You’re personally responsible for its debts and liabilities. It’s simple, easy to setup and doesn’t cost much. You sign all contracts in your own name and get personally sued if any lawsuits arise.
On the plus side, taxation is simpler — whatever income your business earns counts as your income. It’s the simplest form of business but the riskiest one in terms of liability and debt. If anything really serious happens and you’re liable for it, ALL your assets are liable — even your retirement account.
Short-term rental business LLC
An LLC (Limited Liability Company) lies at the intersection of a sole proprietorship, a corporation and a partnership. The main element is that the owners of the LLC are not personally responsible for any of the company’s liabilities.
It’s like a sole proprietorship in the sense that the LLC doesn’t pay income tax itself — you’d have to list the profit and losses on your personal taxes. It does have some tax flexibility.
You only need one owner to form an LLC. I think this is the perfect sweet spot for Airbnb entrepreneurs. You have a simpler form of incorporation without the tons of paperwork that can come with the following, more advanced forms of incorporation.
Forming an S-Corp for your Airbnb business
Forming an S-corporation for your Airbnb business is another option. In this business structure, authorities treat Airbnb business as a pass-through entity. That means you report the proceeds yourself. A benefit of an S-corp for an Airbnb business is that you can pay yourself as an employee.
Give yourself set wages, use the rest as distribution of profit and you will end up paying lower taxes on the profit. The salary you choose will be based on whatever the government determines to be “reasonable” based on the average salary in your field.
One major issue with forming an S-corp is the masses of paperwork. The tax authorities require you to file:
- Form 1120S, U.S. Income Tax Return for an S Corporation
- Form 1120 S (Schedule K-1)
- Form 4625
- Form 2553
- Form 941 and 940
- Form 1040, U.S. Individual Income Tax Return
- Schedule E (Form 1040), Supplemental Income and Loss
- Schedule SE (Form 1040)
- Form 1040-ES, Estimated Tax for Individuals
If you didn’t already have a headache, you probably will with an S-corp. You’ll need to hire somebody to help you with this kind of business structure.
Difference between incorporating and getting a business license
Incorporating your Airbnb business is not the same as getting a business license.
According to the Airbnb website:
In certain jurisdictions, hosts of an Airbnb Experience may be required to register their experience as a business with the local government and/or at the national or federal/regional level. In jurisdictions with business licensing requirements, failure to register could result in fines, penalties, and/or the disruption of the Experience until proper registration is completed.
Based on certain factors, such as the type of service you provide, how often you host your Experience, whether you will be conducting your experience for profit or whether you will be conducting your experience under only your own legal name, your experience may or may not be classified as a business in your jurisdiction. In other jurisdictions, the site or location of the experience may be used to determine what type of license or permit is required.
Long story short: it depends on where you operate your business.
There’s only one way to find out what the regulations are for you: the long way.
Go to your local jurisdiction and find out what kind of business license you need to run your Airbnb business. This will be regardless of whether you have a sole proprietorship, S-Corp or LLC for your Airbnb business.
How to Incorporate Your Rental Property
So now you’ve decided to incorporate your Airbnb. How do you actually do it?
Step 1. To incorporate your rental property, you have to find a name for your business. You can either choose your own name or come up with a new one. Make sure nobody else is using it.
It’s easy to find if someone else has the business name you’re targeting. All 50 states have databases where you can look for registered business names. You don’t need to reserve the business name.
Step 2 will be to find an online company to help you file your new Airbnb LLC or S-Corp. Some recommendable companies are:
The platforms are pretty easy to use. As always, I recommend talking to both a legal and tax professional to make sure you’re set up the best way for your business and circumstances.
Conclusion
Incorporating your rental property may or may not be for you. As for every situation, it has its pros and cons. Your best bet as always is talking to a professional.