What Are the Downsides of Forming a Limited Liability Company?
First, for you to use the LLC to shield yourself from personal liability, the LLC needs to be a "real" entity in the sense that there is a separation of books and records, and that the LLC is administratively maintained in the proper way. A person suing the LLC can sometimes pierce the “corporate veil” and still go after your personal assets.
If your rental properties are residential properties (defined as properties with one to four units), forming an LLC can have consequences on your financing options. Many financing programs and banks offer lower interest rates and longer-term loans for smaller individual landlords. Moreover, because these programs are designed for small landlords as opposed to businesses, if you buy your rental property as an LLC or corporation, you may not qualify for these lower-interest rate financing options. This means you may need to prepare a larger down payment, pay a higher interest rate, or borrow the money for a shorter period (or all the above).