Do I Need an LLC for My Airbnb Business?
By: Drake Forester | Last Updated August 13, 2021
Opening your doors to strangers could also open the doors to personal liability—that’s why starting a limited liability company (LLC) for your Airbnb might be a wise choice. Not to say that your tenants will be swinging off of your chandelier, but accidents happen.
You can, however, protect yourself against any legal action or financial penalties your Airbnb might experience. Plus, starting an LLC for your Airbnb business gives you tax options that can help you keep more of the cash you’ve earned. Below is everything you need to know about how forming an LLC for your Airbnb can do just that.
Should I Start an Airbnb LLC?
In a word, yes—starting an LLC for your Airbnb can shield your personal assets and afford you some tax benefits. But you’ll probably need to get comfortable with two other words: “it depends.”
Even though the information below is generally applicable, you should consult a legal or real estate expert to help you navigate the laws specific to where you want to operate your Airbnb. There are more case-specific details to consider, but we’re not here to overwhelm you with technicalities—we’re here to clarify your options when it comes to creating an LLC for your Airbnb.
Airbnb LLC Benefits
Liability Protection: The major benefit of setting up your Airbnb property under an LLC is that you will have that added layer of liability coverage in the event that your business faces any legal actions or potential debt. A Limited Liability Company (LLC) is a type of business entity that shields owners’ personal assets from debts or lawsuits their business might incur. We live in a very litigious culture—people are quick to sue. It stands to reason that your clients—clients who live, eat, and sleep on a property owned by your business—might sustain bodily harm or property damage and want to hold you liable. Forming an LLC can insulate your personal assets.
Tax Flexibility: LLCs give you some leeway in how you file your taxes, but it’s important to note that if you intend on running an Airbnb without forming an LLC or some other business entity, the IRS will recognize your business as a sole proprietorship. This means your business profits pass through to you, and you report those profits as personal income. That income will likely also have a 15.3% self-employment tax tacked onto it along with state taxes where applicable.
This is where forming an LLC works to your advantage: once you form an LLC for your Airbnb, you can obtain S-corporation (S Corp) status with the IRS. Assuming your Airbnb business makes enough money to justify this approach, electing to be taxed as an S-corporation will require you to pay yourself a reasonable salary for the the services you provide to your business. By paying yourself a reasonable salary, you can mitigate that self-employment tax by splitting your income between W-2 wages (your salary) and distributions (dividends). Only the W-2 wages are subject to self-employment taxes, so you effectively reduce your tax burden.
Not sure where to begin when it comes to taxes? The IRS offers a rental income quiz, a handy tool for determining taxable income and deductions for your individual rental situation. Armed with this info, you can better see if you would benefit from the tax flexibility of an LLC.
Airbnb LLC Drawbacks
Initial and Ongoing Costs: Starting an LLC for your Airbnb isn’t going to be free. If you only plan to host once in a blue moon and won’t make the profits to justify the cost of an LLC, then you might opt to remain a sole proprietorship. There will be state fees to form the LLC and, in most cases, annual fees to maintain your LLC status. But if you’re thinking to make Airbnb a major source of income, then the cost of starting and maintaining an LLC will provide you the comfort of knowing you have a legal barrier protecting your personal assets.
State and Local Laws: Where will you conduct business? Forming an LLC won’t normally cost more than the typical fees, but some states levy additional taxes on LLCs. For instance, if you’re planning to run your Airbnb business in California, your LLC must pay an annual franchise tax of $800. Mind you, state and local laws aren’t just a drawback in terms of LLCs. Some locations can become cost-prohibitive as a result of licensing requirements and occupancy taxes, regardless of whether you form an LLC.
Your best bet is to check first with the state—usually the Secretary of State—to get a sense of potential taxes or red tape. Then, review local laws—a few of which Airbnb lists under “Local Regulations”—to get a better sense of the licensing requirements and cost of entering the online lodging marketplace.
LLCs for Airbnb: The Bottom Line
So, would creating an LLC for your Airbnb be a good idea? Yes, absolutely. Starting an LLC can protect your personal assets in the long run, but it will cost a bit of investment in the short-term. In most US cities, you’ll never need to worry about excessive red tape—all you’ll need to do is form an LLC and deal with the upfront costs particular to your business’s location.
Keep in mind, though, that this is not an exhaustive list. There are more nuanced matters for certain situations. For instance, securing a mortgage for an LLC in the first place can be difficult. Likewise, transferring a mortgage from your name to an LLC might trigger a “due on sale” clause. Basically, your entire mortgage would become due immediately. If your bank does allow you to transfer the mortgage to an LLC, you might be required to provide a personal guarantee—this guarantee might undermine the liability protection of an LLC since you are still technically responsible. While it’s possible to navigate these situations, be sure to consult your bank and a CPA or real estate attorney to help you sort out the particulars.
LLCs for Airbnb FAQ
How do I form an LLC for my Airbnb?
You would go about forming your LLC the standard way: choose a name for your LLC, appoint a registered agent, file articles of organization with the state, and in case you decide to file your taxes as an S Corp, apply for an Employer Identification Number.
Once you’ve formed your LLC, you now want to make sure that your LLC has a bank account—separate from your personal account—to receive income from your Airbnb business. Likewise, the title and mortgage of your home should be listed under the LLC, along with any other paperwork associated with your Airbnb business. After all, the LLC is basically acting as a person here, absorbing potential fallouts so that you won’t be personally liable down the road.
What if more than one person owns the Airbnb LLC property?
LLCs are pretty flexible, and the neat thing about that is you can choose to form as a single-member or multi-member LLC. See, LLC owners—known as “members—can form as a multi-member LLC. So if you plan to run your Airbnb alongside other people, an LLC can help establish some structure and formality without getting as bureaucratic as other business entities.
Should I get an LLC for multiple Airbnb properties?
Yes, but your best bet is create an LLC for each Airbnb property or form a series LLC. Say you have one LLC for three properties. If one of those properties gets sued, the other two properties can be named as well. You can avoid this kind of entanglement by creating three separate LLCs or by forming a series LLC.
Would an LLC be a good idea if I want to rent only part of my property?
If you want to run a true bed and breakfast, you have to remember that one of the major advantages of an LLC is that it allows you to claim that your personal assets and business assets are separate. If you host via Airbnb and plan to live under the same roof as your guests, then you’re blurring the distinction between personal and business. It would be pretty easy for a legal professional to “pierce the corporate veil” in this instance, so whether an LLC and pristine records can shield you is a tough call.
Can I form an Airbnb LLC as a renter?
If you are renting your property, then you should consult with your leasing office or Homeowners’ Association (HOA) to ensure that you are allowed to run an Airbnb before you start an LLC. There is no issue with forming an LLC in this instance, but with regard to liability, it’s likely that the actual owners won’t want to become liable for your business activities on their premises.
Now that you know the benefits of forming an LLC for your Airbnb…