If you plan to start hosting on Airbnb, chances are you’ve heard about the possibility of starting a limited liability company (LLC) company to rent out your properties. This is a smart option for long-time hosts as well who would like to protect their personal assets while managing Airbnb homestays.
Even though forming an LLC is only one way of optimizing your Airbnb business, it’s by far one of the most suitable options for sole owners though keep in mind that creating and managing an LLC is a bit more complex than just signing some papers, and it might not be suitable for your business.
But since LLCs are one of the most common business models in the Airbnb industry, it’s highly likely that the many benefits of this structure will help you advance your venture.
What Is an LLC?
An LLC is a type of business entity combining the legal specifics of other business structures, namely partnerships and corporations. LLCs are particularly similar to sole proprietorships and general partnerships by way of taxation.
An LLC is typically taxed in the same manner, i.e. every owner/member includes their share of company profits and losses in their personal tax returns as opposed to filing a corporate income tax.
What’s curious about the LLC model is that there is an option to choose the preferred taxation method, meaning an LLC may be registered to be taxed as a corporation. This method is not exactly popular, but there are some positive aspects that the LLC model borrows from corporations, the main one being the separation of financial accountability.
What does this mean exactly? Unlike certain business models, the LLC protects its members from potential lawsuits brought against other owners or the company as a whole. As a rule, your personal assets will avoid litigation that involves the LLC itself or other members.
Why Starting an LLC for an Airbnb Business Is Important
Limited Liability
As an Airbnb host, ensuring your personal asset protection is one of the most essential parts of entrepreneurship. And the easiest way to isolate your assets from that of your business is to form an LLC.
The LLC model gives your business limited liability insurances regardless of the size and type of your Airbnb hosting operation. When you form an LLC to conduct your hosting, these personal asset protections become applicable to personal property rentals (such as leasing out your house or apartment) as well as multiple listings under your supervision.
So why do these limited liability insurances matter? The main reason Airbnb hosts choose to go down the LLC route is to ensure their personal property cannot be brought into legal actions against the company itself.
For instance, if a lessee files a lawsuit for damages (e.g. personal injury claims sustained on your property), your personal property, valuables, bank accounts, or other capital won’t be at risk which can’t be said for similar cases with lawsuits against private individuals (property owners, lessors, landlords) without the LLC structure acting as a buffer.
Taxation
The ability to choose the exact method of taxation for your business is among the key advantages of the LLC for an Airbnb host, making it much more flexible and less costly compared to what you’d get as an informal business entity. Let’s look closer at the available taxation methods.
Pass-throughs
When forming an Airbnb hosting LLC, you can choose for its future taxation to be the common flow-through method often seen in business taxation for general partnerships, S-corps, sole proprietorships, and LLCs.
For single-member LLCs, choosing this method basically means they will be taxed as a sole proprietorship, while multi-member LLCs will be a tax equivalent of general partnerships.
A pass-through structure eliminates the many steps of the corporate income tax required for many federal business entities and instead allows LLC owners and members to file it in their personal income tax. This means that the company is essentially exempt from federal tax, and all its taxable income flows through the personal tax returns of its owners.
Keep in mind that pass-throughs are subject to the SECA tax (Self-Employment Contributions Act) at the rate of 15.3% as deducted from individual profit shares.
C-corporations
Even though you can technically choose to tax your Airbnb business as a C-corporation, the method is generally avoided by many LLC owners due to its double taxation process that can be rather costly. A C-corp structure implies that the company’s profits are subject to corporate income tax first, after which all of the entity’s members will also be taxed individually based on their profit shares.
S-corporations
The S-corp taxation model comes with its own conditions but is fairly compatible with the requirements in running Airbnb rental businesses. For example, to elect S-corp taxation, your entity’s ownership group must not exceed 100 people who are also required to be either US citizens or residents.
As a whole, this method is somewhat similar to pass-throughs and can help your Airbnb business save money by eliminating double taxation. The main difference between the S-corp and pass-through taxes is the SECA tax, or rather the lack of it with the former.
Though the S-corp taxation does not include the SECA tax, an ownership group can deduct the self-employment tax from net earnings as per Schedule E form of the IRS Supplemental Earnings and Loss.
Still, the S-corp may fall under the FICA tax (Federal Insurance Contributions Act) in connection with the Social Security program. Paying federal payroll tax earns you potential Social Security benefits.
What makes this taxation model more attractive for Airbnb businesses is the ability to cut out the unnecessary spending and pour it into purchasing new properties, investing in existing locations, and expanding as a whole.
Credibility
Operating under the name of an LLC as opposed to your legal name can undeniably give you more integrity as an entrepreneur. There is, of course, no shame in operating an informal business entity and therefore using your own name for all activities involved in running a sole proprietorship, but potential investors and business partners are likely to take you more seriously if you run a formal business structure.
This aspect holds a bit more weight with retail and restaurant businesses than with Airbnb rentals since the customers view leased properties as part of Airbnb as a corporation rather than separate entities. Even so, operating as an LLC may do your reputation wonders, particularly with contractors and third-party vendors like renovation, cleaning, and catering services.
How to Start an Airbnb Hosting LLC
The state of operation plays a huge role in the procedure as a whole given that most jurisdictions come with additional steps and requirements involved in the formation process for LLCs.
Despite some significant disparities, it is actually possible to outline a more or less universal process for establishing such an entity. To get a more detailed overview of the key steps required, feel free to look through our complete guide regarding the subject.
To summarize, most states expect you to go through the following steps of the LLC formation process:
- Choosing an available LLC name;
- Designating a registered agent;
- Filing the articles of organization with the Secretary of State;
- Acquiring an EIN;
- Drafting an LLC operating agreement;
- Establishing a financial infrastructure;
- Obtaining licenses and/or permits;
- Managing taxes;
- Fulfilling maintenance requirements like filing annual reports, franchise taxes, et al.
The 3 Best LLC Websites
Forming an LLC for any business, including Airbnb hosting, can be done in three major ways: by hiring a business attorney, paying for an online business formation service, or by going with the DIY method.
The cheapest option you choose is by far the DIY route, but it can prove to be rather tricky in the long run, especially for first-time entrepreneurs who are not well-versed in the intricacies of LLC formation.
Finding a lawyer can fix this problem and help you along the way, but most single-member LLCs and start-ups can’t exactly afford the services of a reputable attorney at the early stages of their business.
And it’s precisely why so many business owners resort to hiring an online LLC service—to save money as well as ensure their formation paperwork is compliant. Out of dozens if not hundreds of formation service providers capable of handling all main steps of LLC formation, albeit with varying degrees of thoroughness.
A service like that can’t compete with a certified attorney in terms of legal proficiency but many reliable formation companies offer legal consultation services and generally cover the tricky bits of the formation procedure that would pose difficulties with the DIY method.
If you want a more comprehensive breakdown of leading formation companies, be sure to check our guide to the top 7 best LLC services on the market. In order to give you a brief picture, let’s narrow them down to the three best options for business formation service:
🥇 ZenBusiness — Best Overall Value
As a more broad-spectrum service, ZenBusiness focuses on expansive packages with a great range of extra features. Even their lowest-priced $39 plan is pretty inclusive, adding a year of registered agent service.
They are also strong with their customer base as is evident from their consistent customer feedback. All in all, this might be your best option if you want to get an affordable extensive formation package.
IncFile — Cheapest LLC Service
Regarded as the most affordable option in the business, IncFile provides a free formation package straight out of the gate while maintaining their reputability and quality of service.
Their entry plan costs exactly $0 + state fee and includes a year of free registered agent. As their vast feedback suggests, the service is primarily chosen for its accessibility, both in terms of pricing and ease of use.
Northwest – Premium Support
As the most expensive out of the three, Northwest may seem a bit excessive at first, especially with their upfront payment of $225 + state fee.
What makes them a worthy option to consider is their thorough registered agent service considered to be one of the industry’s best. The annual fee for the service is $125, but their in-depth approach to managing your correspondence and documentation is more than worth it.
Another point in Northwest’s favor is the high-quality customer support for LLC services available by phone, email, and online. By offering a premium service with consistent office hours, Northwest undoubtedly secures itself as a top contender.
Additional Resources for Starting an Airbnb Hosting Business
- Airbnb Resource Center: Those who already operate an Airbnb hosting business will find that the necessary basics have already been covered by the parent company in their official Airbnb Resource Center. There you will find dozens of comprehensive guides to help you create better listings of your rentals, make your homestays more guest-friendly, cover safety and health aspects of hosting etc.
- AirHost Academy: As its name suggests, AirHost Academy works as an extensive educational service for first-time Airbnb hosts and those planning to try their hand at running a rental business. The Academy can help you get acquainted with the process of opening a rental, placing a listing, preparing a property with various ideas for optimizing interior design (even down to the little details like the types of kitchen appliances you might need for your space) and much more.
- Lodgify: Lodgify is a cloud-based software helping you optimize your Airbnb properties with their vacation rental system. This includes improving your search engine rankings, helping you automate certain procedures, and save considerable amounts of money while doing it. Plus their resources page and blog offer plenty of educational materials.
- Get Paid for Your Pad: Another helpful online resource, Get Paid for Your Pad covers most aspects of hosting and offers a detailed list of 26 Airbnb tools including apps, info sources, and more. The tools offered on the site can be of great help when managing your rental fees, listings, customer feedback and communication, industry analysis, search optimization, and travel books for your area.
- Laptop Landlord: Laptop is a great source of hosting guides Regardless of your experience as an Airbnb host. They dedicate an entire section to Airbnb Tips for Hosts, arranging educational resources by category, eight in total. Each deals with various aspects of hosting, from getting a property ready (cleaning, renovating, etc) to placing your listing (taking effective photos, figuring out prices, providing the best customer experience etc).