Rental properties make great investments, particularly in high-demand locations like Washington DC. However, renting to tenants can leave you subject to liabilities that potentially threaten your business and other assets. This is why many rental property owners choose to safeguard their investment by organizing a limited liability company. We’ll show you how to start your own Washington DC rental property LLC in this helpful guide.
Why Form an LLC for Rental Property?
Forming a rental property LLC provides several benefits for owners. In particular, LLCs help shield an individual from liability incurred by their company, but a savvy owner can also benefit from tax advantages available to LLCs.
Liability Protection
Rentals can be risky investments. Accidents on the premises can leave you open to a lawsuit and delinquent tenants may affect your ability to pay mortgages and other obligations. And with the legal recourse available to renters in DC, removing a problem tenant or recouping lost rent can be a slow process.
Under such circumstances, an owner organized as a sole proprietor or part of a partnership (where the business and the individuals who own it are legally the same) is vulnerable to losing their property or other personal assets if they cannot cover costs. With an LLC, your rental company is legally separate from yourself as an individual, so in the event of financial issues or legal action, only the assets owned by the company are at risk. Your company could lose a property, but you won’t have to worry about losing your car or your home!
Tax Benefits
By default, your LLC is a pass-through entity for tax purposes. The business pays no corporate income tax, and money made by the LLC is reported on the tax returns of member owners and paid at the federal self-employment rate of 15.3%.
In Washington DC, all for-profit businesses must pay a franchise tax. LLCs are considered unincorporated businesses, meaning their franchise tax is 8.25% for gross receipts exceeding $12,000. However, unincorporated businesses are also allowed a 30% salary allowance for owners and a $5,000 exemption deductible from net income—exemptions that are not allowed for the corresponding corporate franchise tax.
Forming Your Rental Property LLC
When forming your rental property LLC, you’ll follow the standard steps for starting an LLC in Washington DC:
- Name: You’ll need a name for the company that complies with the rules of the Code of District of Columbia for LLCs—with an indicator of its LLC classification and distinguishable from other DC businesses.
- Registered agent: Washington DC requires all LLCs to have a registered agent that accepts legal mail on behalf of the business. The registered agent must have a physical address in the District and be available during business hours. You can be your own registered agent, or name someone you know for the role, but many businesses choose a professional registered agent service (like Northwest) for freedom and convenience.
- Articles of Organization: You’ll need to submit Articles of Organization to the DC Department of Licensing and Consumer Protection to register your LLC with the District and officially form it. The Articles of Organization is a form that will require you to provide information about the company. It costs a minimum of $99 to file.
- Operating agreement: You should write an operating agreement for your LLC, the document that outlines the rules for the company and procedures for how it will handle certain situations. Operating agreements typically cover things like initial investments, finances and distributions, voting rights, decision-making powers and management, transfer of membership interest, and how the business can be dissolved.
- EIN: You will also likely need to get an Employer Identification Number from the IRS. This is the nine-digit number that will be assigned to your company for tax identification. While not strictly mandatory, you’ll need an EIN if you plan to hire employees or open a business bank account.
Other Rental Property LLC Requirements
Once your LLC is formed, you’ll need to do a few other things to ensure the rental property company is operating legally. You’ll need to transfer property to the LLC, get a Washington DC business license with the correct endorsement, and register with the Rental Accommodations Division.
Transfer Property
If you formed your LLC to operate a rental property company for real estate you previously owned, you will need to transfer that property from your ownership to the LLC. You will need the following:
- Deed: If you already have property you want transferred to the LLC, you’ll need the deed to the property. If it’s been misplaced or lost, you will need to get a certified copy of the deed from the Recorder of Deeds at the Office of Tax and Revenue. Certified copies are $4.50 per page, and carry an additional $6.50 document surcharge fee. The deed will need to include a full name on the deed, the property’s address, and the year it was purchased.
- Deed Forms: The Recorder of Deeds will also be able to provide you with forms to transfer your deed to the LLC. You’ll either use a warranty deed, special warranty deed, or a quitclaim deed—all of which are valid for the sake of transferring property, but are distinct documents serving different purposes. Whatever kind of deed form you get for your transfer, fill out those forms using your legal name as the grantor and the full legal name of your LLC as the grantee. Filing the forms costs $31.50.
- Signature & Transfer: You will need to provide a signature for the transfer in the presence of a notary. Submit the deed to the Recorder of Deeds.
- Transfer Taxes: Washington DC assesses two taxes when transferring a real estate deed. These are a Transfer Tax and a Recordation tax. The two taxes have identical rates of 1.1 percent, for an effective combined rate of 2.2 percent of the consideration (actual amount paid or to be paid for the property)—increasing to 2.9 percent for property with consideration of $400,000 or more.
Get a DC Business License
Your LLC will need a Basic Business License for a rental housing business to operate in DC. Depending on the type of rental, you’ll need one of three possible licenses.
- One-Family Rental: For renting single-family homes, townhouses, duplexes, individual condominium units or individual rooms. The fee for this license is $198.
- Two-Family Rental: For renting basement apartments or secondary structures to a single-family home. The fee for a two-family rental license is $283.80.
- Apartment Houses: For renting buildings with three or more dwelling units. Apartment house rental license fees range from $453.20 for three units to 883.30 for ten or more.
In addition, rentals must be inspected before a business license can be issued. The inspection is free, but if a property fails inspection or must be rescheduled less than two days before the scheduled inspection date, a $90 re-inspection fee must be paid.
If you have multiple properties in different categories, you’ll need a license for each applicable category. Basic business licenses are valid for two years.
Register with the Rental Accommodations Division
All rental housing in the District of Columbia is subject to the Rental Housing Act of 1985, administered by the Department of Housing and Community Development’s Rental Accommodations Division. As a result, rental property companies and other rentals must register with the Rental Accommodations Division in order to complete their business licensing—one- and two-family rental licensees must register after their license has been issued, while apartment licensees must register upon submitting their license application, then return to the Department of Licensing and Consumer Protection with the approved registration form to have their license approved and issued.
Rental Accommodations Division registration can be accomplished by completing their application and submitting a $43 fee per unit.
Update Leases
Finally, you will need to update any preexisting leases in your name to show that the LLC is now the official landlord. Notify your tenants that rent must now be paid to the LLC instead of any personal account you previously used.