Airbnb hosts must protect themselves from liability. The potential costs of hosting add up quickly whether it’s a fine for a zoning violation or a tenant injury lawsuit. Forming a holding company may protect you and your business. It at least adds another layer of protection as an Airbnb host. The question remains if it is worthwhile for hosts to pursue an LLC holding company. Many times, an organizational structure protects your personal assets from liability, but you may want to think past the traditional S-Corp and C-Corp possibilities.
What is an LLC Holding Company?
Holding companies basically hold a large percentage of ownership in one (or more) companies. An LLC holding company provides a vehicle for owning a variety of assets. Business owners can protect their assets from possible liabilities by using a holding company. This type of legal structure may also provide significant tax benefits. A holding company does not have employees, revenue, or any day-to-day operations. It is just a legal entity that owns assets like businesses or properties. In the event you get sued, the holding company shields assets it does not own directly from potential liability.
Example of a Liability Shield
Let’s say that a person owns four properties. Each of these properties has a separate LLC holding company. Then, one of your tenants trips and falls. They sue you for negligence. However, the lawsuit can only claim liabilities against the property where the “negligence” occurred. Why is that? The LLC holding company provided a legal separation between the properties. If you owned all four of the properties directly, then the lawsuit would be able to target all the assets in your portfolio.
LLC and LLC Holding Company – What’s the Difference?
An LLC, or limited liability company, is a legal entity. A sole owner of an LLC allows profits, losses, and other tax consequences to flow through to their personal tax returns. In earlier days, a holding company had dual purposes. It limited investors’ liability and provided extra capital to the existing business. Today, an LLC is used as a holding company to help protect assets from lawsuits and creditors. The company can appreciate in value without creating taxable gains no matter how many times they are sold.
Specific Benefits of a Holding Company
An Airbnb can use an LLC holding company to protect their rental and other assets from a liability judgment. However, this type of legal structure has both some benefits and a few drawbacks. The most noteworthy perk of forming one is liability protection. But they can also help a company group and organize rental assets. For example, an owner could form an LLC holding company for all their rental units in the state of Virginia. Or an owner could choose to form an LLC holding company for just vacation rentals. However, the liability protection provided is likely to be the most valuable to Airbnb hosts.
In most cases, a host forms the holding company to serve as the legal owner of the rental property. Once the LLC is formed, they name themselves as the managing member. Any liability claims in a lawsuit must be directed at the property owner which is the holding company LLC. Plaintiffs do not make claims against individual owners. The LLC acts as a shield for personal assets and protects them from legal claims. The owner maintains ownership and control of the rental property since they own the LLC.
An LLC can also be used to hold titles for land investments, rental properties, and other financial assets like gold, stocks, and bonds. Profits from these types of investments pass through to your individual tax returns as either capital gains or income. If you form a holding company with numerous members, they all share the ownership of all the assets. Profits are then disbursed based on each member’s share of ownership.
Is it a Good Ideal for an Airbnb Host to Form an LLC Holding Company?
LLC holding companies provide numerous benefits for Airbnb hosts including being an effective liability shield. If you have an Airbnb as a side-hustle but it has grown into a larger multiple-property venture, you may want to consider forming an LLC holding company. An attorney who specializes in forming entities can help you determine if it’s the right choice for you. Some of the biggest benefits of forming a holding company include:
- Protecting personal assets from business liability
- Provides more options for distributing profits
- Provides more options for compensating members
- Far fewer compliance hurdles than other entities and corporations
- Organize and protect your rental portfolio from possible lawsuits