Washington attorney Drew Tingstad explains the pros, cons, and practicalities landlords need to know.
For many landlords, the question of whether to hold rental property in a Limited Liability Company (LLC) comes up sooner or later. It’s a topic that inspires confusion, hesitation, and—sometimes—heated debates in investor forums. Some insist it’s unnecessary paperwork. Others say it’s essential for protection.
According to Drew Tingstad, an attorney with Beresford Booth in Edmonds, Washington, the answer isn’t one-size-fits-all. “The big question I hear all the time is: should I put my rental property in an LLC?” Tingstad said in a recent presentation. “And the answer is: it depends. The considerations abound. If we’re talking about your principal residence, that’s a different story—we typically wouldn’t advise it. But when it comes to rental property, the calculus shifts pretty dramatically.”
What Is an LLC?
An LLC, is a type of business entity that offers significant benefits to property owners. Think of it as a separate legal person created by statute. Historically, this entity type emerged to combine the liability protection of a corporation with the flexibility of a partnership, giving owners the best of both worlds.
LLCs are now a familiar part of the business landscape, but they’re relatively new compared to traditional corporations. They were created to solve a problem: corporations offered liability protection but were rigid in structure, while partnerships were flexible but left owners personally exposed.
“Lawyers and lawmakers eventually figured out we could combine the best of both worlds,” Tingstad explained. “That’s how LLCs came about. They give you the liability protection of a corporation with the flexibility of a partnership.”
In Washington, the LLC Act was first passed in 1994, following similar moves in states like Wyoming and Delaware. Today, LLCs are the default choice for real estate investors of all sizes—from single-property landlords to large syndicators—because of their adaptability.
How LLCs Are Structured
An LLC has a few key roles:
- Members – Owners of the LLC, somewhat like shareholders in a corporation.
- Managers – People who make day-to-day decisions for the LLC. Sometimes the members manage it themselves (“member-managed”); other times they appoint a manager (“manager-managed”).
- Economic Interest Holders – People who have the right to share in profits but don’t get a vote in management decisions (often used with investors or estate planning).
By default, Washington LLCs are manager-managed, but landlords can choose a member-managed model instead.
In a member-managed LLC, all members vote on decisions. In a manager-managed LLC, day-to-day authority rests with the designated manager.
“It’s similar to a corporation’s board of directors versus shareholders,” Tingstad explained. “Some decisions require a member vote, but a lot can be delegated to the manager.”
This flexibility is part of why LLCs are so popular for real estate. You can structure ownership and decision-making however makes sense for your situation.
“You might have an investor who helps you buy a property but doesn’t get a say in how you run it,” Tingstad said. “In that case, you give them only economic rights. They get distributions if the property makes money, but they don’t vote on decisions. It’s a way to raise capital without giving up control.”
Why Put Your Rental in an LLC?
Liability Protection
The number one reason landlords form an LLC is to shield their personal assets
“Say you own a rental property in your personal name,” Tingstad said. “A tenant slips on the sidewalk, sues, and wins a $100,000 judgment. If it’s in your name, your personal assets—your savings, your house—could be on the line. If it’s in an LLC, the judgment is against the company, not you. That shield can be life-changing.”
The shield is not absolute. Courts can “pierce the corporate veil” if an LLC is a sham—such as when an owner co-mingles personal and business funds, fails to keep records, or ignores formalities. “You can’t co-mingle personal and business funds,” Tingstad cautioned. “All income goes into the LLC account. All expenses come out of it. If you treat the company account like your personal credit card, you risk losing that protection.”
Real-world cases underscore the risk. Washington courts have pierced LLC protections where owners failed to respect the separateness of the entity. The bottom line: the LLC works if owners treat it like a true company.
Tax Flexibility
Unlike corporations, which have more rigid tax treatment, LLCs are highly flexible:
- Single-member LLCs are disregarded for federal tax purposes, meaning income flows directly to the owner’s personal return.
- Multi-member LLCs are typically taxed as partnerships, with profits and losses passed through to members.
- Optional elections allow LLCs to be taxed as S-corporations or C-corporations, depending on the circumstances.
This adaptability is a major draw for landlords. “You get to choose how you’re taxed,” Tingstad said. “That’s not something you can do with a corporation. It lets you work with your accountant to optimize for your situation.”
Additionally, if you transfer a property you already own into an LLC, Washington State allows an exemption from the real estate excise tax—removing a common cost barrier.
Estate Planning and Generational Wealth
For property owners thinking long term, LLCs also play a powerful role in estate planning.
“You can gift $12,500 in value per year per child tax-free,” Tingstad explained. “If your property is in an LLC, you can gift membership interests incrementally, reducing your taxable estate while keeping control.”
LLCs also simplify succession. Instead of transferring a deed to real property—a process that can trigger taxes and recording fees—owners can transfer membership interests. “It’s a clean way to pass wealth across generations without constantly re-deeding property,” he said.
For larger portfolios, LLCs can be stacked inside holding companies or family partnerships, creating layered structures that maximize both asset protection and estate tax efficiency.
The Costs and Tradeoffs of Rental Property LLCs
Despite their many advantages, LLCs come with costs and responsibilities landlords need to weigh:
- Formation fees: $180 to file online with the Washington Secretary of State.
- Annual reports: $70 each year to remain in good standing.
- Recording fees: Transferring property into an LLC typically costs just over $300 per deed.
- Local licensing: Cities often require business licenses—Edmonds charges $125, Redmond $153.
There are also practical considerations:
- Insurance: Some insurers may raise premiums when property is held in an LLC, though significant increases are rare.
- Mortgages: Transferring property can technically trigger a “due-on-sale” clause, but lenders almost never enforce it if payments remain current.
- Legal drafting: Boilerplate online agreements may seem affordable but can create costly disputes down the road.
How to Form an LLC for Rental Property in Washington
Landlords who decide to form an LLC typically go through these steps:
- File with the Secretary of State: $180 online, $200 by mail.
- Obtain a state business license: $50 base fee, plus $5 per trade name.
- Apply for city licenses: Costs vary by municipality.
- Record a new deed: About $300+ per property transferred into the LLC.
- Draft an operating agreement: Ideally customized with the help of legal counsel.
- Maintain annual compliance: File annual reports, pay $70, and update records as needed.
From there, discipline is key. “Separate your accounts. Keep minutes. Respect the entity,” Tingstad said. “That’s what preserves the liability shield.”
Common Mistakes Landlords Make with LLCs
According to Tingstad, several missteps can undermine the protections landlords expect from their LLCs:
- Commingling funds: Using the LLC bank account for personal expenses erodes liability protection.
- Ignoring paperwork: Failing to file annual reports can lead the state to dissolve the company.
- Using generic templates: Boilerplate agreements often skip key provisions on voting, succession, or deadlocks.
- Forgetting insurance: LLC liability protection is powerful, but it doesn’t replace insurance—both are necessary.
- Bundling properties: Placing multiple rentals into one LLC may be convenient but reduces asset protection.
Is an LLC the Right Move for Your Rental Property?
While liability is the most obvious benefit, Tingstad emphasized that LLCs are ultimately about planning and professionalism.
“Far and away, the biggest benefit is liability protection,” he said. “But beyond that, it’s about structure, flexibility, and foresight. An LLC is more than a legal form—it’s a way of thinking ahead.”
Tenants often feel more comfortable renting from an entity rather than an individual. Banks and partners appreciate the professionalism. And heirs benefit from clarity when ownership interests are clearly defined.
“It’s not just about forming the entity,” Tingstad concluded. “It’s about being intentional. If X happens, you know Y will follow. That peace of mind is invaluable.”
For landlords, deciding whether to put rental property in an LLC is not a box to check—it’s a strategic decision. The structure offers protection, tax flexibility, and estate planning advantages, but only if set up carefully and maintained with discipline.
The modest costs pale in comparison to the risks of owning rental property in your personal name. For many landlords, the LLC is both shield and strategy—safeguarding today’s investments while laying the groundwork for tomorrow’s success.
The Joseph Group specializes in helping landlords across the Puget Sound region protect their investments and maximize returns. Whether you’re weighing the move to an LLC or simply want stress-free property management, our team provides the structure, expertise, and support you need. Contact The Joseph Group today to learn how we can help.
