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Accounting and Tax Tips Blog

While we’re not lawyers and cannot give legal advice, we can speak to the tax implications of incorporating or LLC’ing your Airbnb, VRBO, Homeaway business. It is more important than ever to protect yourself from lawsuits and damages that could stunt the growth of your business. Forming your business as any of the following will protect your personal assets if your company is sued:

  • C Corporation
  • S Corporation
  • Limited Liability Company (”LLC”)

Why Form a Corporation?
S Corporations are preferable to business owners because they are treated as pass-through entities, meaning the income gets reported through the owners. C Corporations, on the other hand, are subject to a separate corporate tax AND a dividend tax, resulting in “double-taxation”.
Another benefit of forming an S-Corporation is that you can elect to treat yourself as an employee of the corporation. This would allow you to pay yourself a salary and treat the rest of the profit as a distribution, paying a lower tax on the amount. The salary has to be “reasonable” which is determined by several factors, such as the average salary in your field.
One of the drawbacks of forming an S Corporation is the complicated and significant number of requirements and complicated paperwork. Some of the paperwork required to maintain your S Corporation includes, but is not limited to:

  • Form 1120S, U.S. Income Tax Return for an S Corporation
  • Form 1120 S (Schedule K-1)
  • Form 4625
  • Form 2553
  • Form 941 and 940
  • Form 1040, U.S. Individual Income Tax Return
  • Schedule E (Form 1040), Supplemental Income and Loss
  • Schedule SE (Form 1040)
  • Form 1040-ES, Estimated Tax for Individuals

There might also be state requirements for forming an S Corporation. Here’s a helpful article on how to file taxes if you’re incorporated:
Why Form an LLC?
Forming an LLC might be a great option for your Airbnb business because they are much simpler to form and maintain. The preparation of tax forms each year is also significantly less complicated than for an S Corporation. LLC’s provide the same liability protection as S and C Corporations, and like C Corporations are pass-through entities. Basically, forming an LLC has all the same benefits as an S Corporation without the complicated paperwork.
For LLC owners, filing taxes only needs to be performed once per year on April 15th. For a single-member LLC, the taxpayer is required to file a form 1040 and a Schedule C. These are the same requirements as a sole proprietorship.  
Personal Liability for Business Debts
One thing to note however, there are some rare situations when the liability protection of a corporation or LLC doesn’t apply, when there was negligence on your part.  A court may make the decision to “pierce the corporate veil,” which is the legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders.
This means that the owners of the business, including its officers, directors and shareholders, would become personally liable for the debt of the company. Closely held companies are generally more susceptible to losing limited liability status. If you want to protect your personal assets and maintain the limited liability status of the corporation or LLC, it is important that you comply with all of the rules for forming and maintaining your LLC or corporation.
You should also make enough investment in the LLC or corporation to ensure that it is adequately capitalized to be considered as a separate entity. Make sure to never commingle personal assets with the LLC or corporation. The best way to avoid becoming personally liable for the debts of your business is to avoid use the corporation or LLC to engage in activities that are fraudulent, illegal or negligent in the first place.
Business Deductions to Help You Save on Your Taxes
Forming an LLC or corporation for your Airbnb business can also help you to save on your taxes. You might consider depreciation methods and figuring out which business start-up costs you can deduct. Business start-up costs include costs incurred while:

  • Creating an active trade or business
  • Investigating the creation or acquisition of an active trade or business

Some of the costs of forming a corporation may also be deductible, such as the costs to hire lawyer, accountant or tax professional. These costs have to be amortized to be deducted.
Overall, an LLC or corporation offers a viable way to protect your personal assets when you operate an Airbnb rental business. However, make sure that you also check the start-up rules for your state as the filing and reporting requirements vary from state to state.