If you’re an Airbnb host, one of your top priorities should be protecting yourself from liability. Whether it’s a tenant suing over an injury or a municipality fining you for a zoning violation, the potential costs of hosting can add up quickly. One way to protect yourself is by forming an LLC holding company for your Airbnb business. As an Airbnb host, you may have heard of creating an LLC holding company to add another layer of protection between you and your business. But what exactly is the purpose of an LLC holding company? Is it a worthwhile endeavor for hosts?
It’s important to understand that many organizational structures are possible beyond the traditional C-corp and S-corp to help protect your personal assets from liability. One such structure is called a Holding Company, which is a company whose main asset is a large percentage ownership in one or more other companies.
This legal structure has many benefits, but also some drawbacks that make it impractical for some hosts. Here’s what you need to know about LLC holding companies and whether they’re right for you.
What is an LLC holding company?
An LLC holding company is a limited liability company that serves as a vehicle for owning various assets. Holding companies allows owners to protect their assets from potential liabilities, and they also carry tax benefits.
Holding companies typically have no employees, day-to-day operations, or revenues. It merely serves as a legal entity that owns assets such as properties or businesses.
If you’re sued, the holding company will shield any assets that it doesn’t directly own from potential liabilities.
Liability Shield: Example
For example, you have 4 properties and each has its own separate LLC holding company. Then, a tenant slips and falls and sues you for negligence. The lawsuit can only claim liabilities against the property where the alleged negligence occurred because of the legal separation provided by the LLC holding company. If you owned all 4 properties directly, the lawsuit could target your entire asset portfolio.
What is the difference between an LLC and an LLC holding company?
A limited liability company, or LLC, is a separate legal entity. Profits, losses and other tax consequences flow through to your personal tax return if you’re the sole owner of an LLC. A holding company was once used to limit investors’ liability in business ventures and give existing businesses extra capital. When used as a holding company today, an LLC is often set up to protect assets against creditors and lawsuits while allowing them to appreciate in value without creating additional taxable gains each time they are sold.
What are the benefits of a holding company?
Airbnb can form an LLC holding company for their rental to protect their other assets from a liability judgement. However, this legal structure has both benefits and drawbacks.
Liability protection is a holding company’s most noteworthy perk, but they carry many additional benefits. For example, you can use LLC holding companies to group and better organize your rental assets.
For example, you can form an LLC holding company containing all your rental units in the State of California. Or, you might choose to form an LLC dedicated exclusively to holding vacation rentals.
However, liability protection is probably the most valuable benefit for Airbnb hosts. Typically, hosts form a holding company to service as the legal owner of their rental property. Then, they name themselves as the holding company’s managing member. In this scenario, a lawsuit must direct any liability claims against the property’s owner, the holding company LLC.
Plaintiffs cannot make claims against the individual owner, so the LLC shields your personal assets from legal claims. Best of all, the owner still maintains control and ownership of the rental property through its ownership of the LLC.
You can also use LLCs to hold titles for your rental properties, land investments, and other financial assets like stocks, bonds, and gold. If so, the holding company serves as the legal owner of these assets. Any profits from these investments will pass through to your tax return as income or capital gains. If your holding company has multiple members, you share ownership of the assets, with profits disbursed according to each member’s ownership share.
Should Airbnb Hosts form LLC Holding Companies?
LLC holding companies provide an effective liability shield and many other benefits for Airbnb hosts. You should consider forming one if your Airbnb side-hustle has grown into a multiple-property empire. However, you should consult with an attorney specializing in entity formation to ensure it’s the right choice for your business.
Some of a holding company’s most notable benefits include:
- Protect your personal assets from business liabilities.
- Get more options for distributing profits and compensating members.
- Fewer compliance hurdles than corporations and other entities.
- Compartmentalize and protect your rental portfolio from potential lawsuits.
Want To Get Started?
Holding companies are an extremely useful tool for Airbnb hosts, who can use them to protect their personal assets from liability and to keep their finances separate from the companies they own. An LLC holding company is not just a liability shield, it is also a tax shelter when set up correctly, and it allows you to put your assets under the umbrella of your LLC.
The best part? You can set up an LLC holding company for through Airbnb’s website!
Here’s how it works: You can form one LLC per Host Protection Plus policy, and each LLC can have multiple properties within one state. If you own properties in other states, you’ll need to organize multiple LLCs.
To get started with Airbnb’s Host Protection Insurance, log into your account and click on “Host Protection Insurance” under the “Tools” tab in the main navigation bar. Then, click the blue button that says “Get Started.” Once you’re on the insurance page, click “Organize an LLC” to begin your application.
Contact Shared Economy Tax today to ensure forming an LLC Holding Company is the right choice for your tax circumstance. Our talented tax pros have been working with successful hosts like you for years, so we have an understanding of the industry’s nuances and challenges that competing firms simply cannot match. We’ll can help you work through all the tax implications that come with forming a holding company and much more. Get started with a one-on-one strategy session with one of our tax specialists today.