Where should I form an LLC for Airbnb arbitrage?

This article will discuss forming an LLC for Airbnb arbitrage. Airbnb arbitrage usually means renting a home and then re-renting it on Airbnb. However, the term is also used for people renting out a room (or the whole home) of their own house, whether they rent or own.

Note: This article doesn’t discuss more advanced asset protection strategies for people purchasing multiple properties. We’ll be covering that in a separate article soon.

Where an LLC should be formed (or registered as a foreign LLC) comes down to where it is legally transacting business.

• Related Article: Domestic LLC vs Foreign LLC

While it is best practice to speak to a business attorney, generally speaking, most Airbnb hosts will be doing business in their home state and in the state where they are arbitraging properties.

For most Airbnb hosts, they are usually living and doing business in their home state.

Let’s look at an example.

Airbnb in your home state

Say you live in Pennsylvania and are running Airbnb activities in Pennsylvania. Then Pennsylvania is where the LLC should be formed.

Airbnb outside of your home state

Let’s look at some examples.

Living in Florida with property in Georgia:

Say you live in Jacksonville, Florida and are running Airbnb activities in Savannah, Georgia. Since most people would technically be transacting business in both states, the “correct” setup would be to form an LLC in Florida and then register the Florida LLC as a foreign LLC in Georgia.

Since LLCs are governed by state law, the easiest way to think of this is that you are “extending your LLC’s authority” to also do business in states outside of the state in which it was formed.

Note: Because the LLC was formed in Florida, it is granted authority to transact business in the state of Florida.

A few things to keep in mind:

1. When an LLC is registered in another state, you don’t have “multiple LLCs”, you still just have 1 LLC. More specifically, it’s one LLC with authority to do business in all the states in which it’s registered. Therefore, that LLC will still have one Operating Agreement, one EIN Number, and one LLC bank account.

2. If you formed domestic LLCs (an LLC formed in Florida and an LLC formed in Georgia), then you’re talking about 2 LLCs. Therefore, you’ll have 2 bank accounts, 2 Operating Agreements, 2 EINs, etc.

3. While an LLC formed in Florida and then registered as a foreign LLC in Georgia is likely the “correct” setup for most people in this situation, can you get away with just forming an LLC in Georgia? Maybe. What are the advantages and disadvantages? We can’t comment on something like this. It’s best practice to discuss with an attorney. Meaning, Florida may be more “laid back” and may not come after you (not literally come after you… but impose fines and penalties) for illegally transacting business without having your LLC formed or registered there. Every state has their own laws about transacting business, and it’s far too complex and wide a topic to cover here.

California: If you live in California and are doing Airbnb, you’re definitely doing business there. California is very strict with its definition of what constitutes transacting business. Please see the section about this below.

Living in Florida with properties in Florida, Georgia, and Alabama:

Say you live in Florida and are running Airbnb activities in Florida, Georgia, and Alabama. In this example, your LLC will be transacting business in 3 states. The most “correct” setup would be to form an LLC in Florida and then register the Florida LLC as a foreign LLC in both Georgia and Alabama.

If you live in California

If you live and run an Airbnb business in California, there isn’t much you need to worry about. You can just form an LLC in California.

However, if you live in California and run Airbnb activities in other states, then you’ll most likely want to form an LLC in California and then register that LLC as a foreign LLC in all states where you are doing Airbnb.

The reason we are calling out California is that all California LLCs have to file an $800 franchise tax every year. So a lot of people who live in California think they should form an LLC in another state to avoid these fees.

California is very strict though (both in corporate law and tax law) as for the definitions of “transacting business”. Most California residents’ LLCs will be doing business in the state of California simply by the nature of their owners’ residency.

(Please see when is an LLC doing business in California for more details)

If an LLC was formed outside of California, it would then need to be registered as a foreign LLC in California. Furthermore, California LLC franchise tax will still need to be paid, in addition to other returns of the California Franchise Tax Board that are applicable.

However, it’s usually best to form an LLC in California. If you’re also doing Airbnb in other states, register your California LLC as a foreign LLC in those states.

Airbnb LLC for non-US residents

If you’re not a citizen or resident of the US, the “home state” stuff doesn’t apply to you. Instead, you’ll want to just form the LLC in the state where you are doing Airbnb.

If you want to extend your Airbnb to other states, then you’ll want to register it is a foreign LLC in the other states where you’re doing business.

Keep in mind, as a non-US resident, getting an EIN and opening an LLC bank account are a little different.

We have that information here:

• foreigners getting an LLC EIN from the IRS
• foreigners opening US LLC bank account
• foreign-owned Single-Member LLC and IRS 5472 requirement

How to form an LLC for Airbnb arbitrage

Once you’ve selected the state where you want to form your LLC, visit LLC University: Form an LLC.

Here are the steps:

(there may be additional steps and quirks, depending on the state)

1. Select the state to form your LLC
2. Choose an LLC name (and search the state’s database)
3. Choose your LLC’s Registered Agent (you, friend, family, or company)
4. File the LLC’s Articles of Organization (depending on the state, this may be called a Certificate of Organization or Certificate of Formation)
5. Get an EIN for your LLC from the IRS
6. Check on the annual LLC requirements, if applicable
7. If necessary, register your domestic LLC as a foreign LLC in the other state(s) where it’s transacting business

How to add your LLC to your Airbnb account?

So you have your LLC formed, now what? How do you connect it to your Airbnb account?

Here are the steps:

1. Login to your Airbnb account (Airbnb: login or signup)
2. Click the icon/photo in upper right, then click “Settings” (sometimes appears as “Account Settings”).
3. Click “Settings” again in the menu.
4. Click “Create company account”.
5. Company name: enter your LLC name.
6. Address: enter your LLC’s address.
7. Business address and registered office address are the same: uncheck this box if your LLC’s Registered Agent address is different, and then enter that address.
8. Select “United States” for country of incorporation.
9. Registration number: Airbnb is asking for your LLC’s Secretary of State “ID Number”. Depending on the state where you formed your LLC, this will be called something different. For example, DOS ID Number in New York, Entity Number in California, Document Number in Florida, and SOS File Number in Texas. It’s basically your LLC’s numerical “identifier”. You can find this by looking at your LLC’s approval documents (usually a stamped and approved Articles of Organization, Certificate of Organization, or Certificate of Formation) or by running an LLC name search on the state’s Secretary of State (or equivalent) website.
10. Date of incorporation: This is the same thing as your LLC effective date. It’s the date your LLC went into existence. This date can also be found in your LLC approval documents or by doing a search on the Secretary of State website.

Keep in mind the local laws

While Airbnb will take care of local tax collection, your LLC will also need to adhere to local real estate laws. Meaning, the city, town, or county you’re doing business in may require a short-term/vacation rental license.

There are over 70,000 licensing jurisdictions in the U.S., so we can’t comment on each one here. It’ll be your responsibility to get in touch with the municipalities where you’re transacting business to check on any business licenses or permits that your LLC may need to obtain.

Airbnb LLC & federal taxes

There are several ways your Airbnb LLC may be taxed by the IRS for federal taxes.

A Single-Member LLC (only one owner) is taxed as a Disregarded Entity. That means the LLC is “ignored” and the tax filing obligations are the owner’s responsibility.

• If the LLC owner is a US person, they’ll file taxes as a Sole Proprietor
• If the LLC owner is a non-US person, they’ll file taxes as a non-US resident
• If the LLC owner is another company, it will be taxed as a branch/division of the parent company

A Multi-Member LLC (two or more owners) is taxed as a Partnership by default.

For both Single-Member LLCs and Multi-Member LLCs, instead of the default tax classifications, they can elect to be taxed as a Corporation. There are two types of corporate taxation available:

• LLC taxed as an S-Corporation (more common once net income is sufficient)
• LLC taxed as a C-Corporation (less common)

(Note: An LLC with corporate taxation may not be ideal if you own the property. It may be ideal if you are subleasing. Either way, we recommend you speak with a qualified tax professional.)

A husband and wife LLC (in a community property state where the couple file jointly) can choose to be taxed as a Sole Proprietorship instead of a Partnership. This is a special type of tax election with the IRS called a Qualified Joint Venture LLC.

Disclaimer:
Keep in mind that this is just a high-level overview. Taxes usually need to be both reported and paid on three levels: federal, state, and local. And yes, Airbnb does take out local real estate taxes (not income taxes). However, it will be your responsibility to properly file federal, state, and local taxes. We recommend that you speak with a qualified tax professional. Please see how to find an accountant for your LLC for more information.

What did we miss?

Is there something we forgot to cover? If so, please leave your question in the comments below.

Matt Horwitz

Founder & Educator, LLC University®

Matt Horwitz is the leading expert on LLC education, and has been teaching for 15 years. He founded LLC University in 2010 after realizing people needed simple and actionable instructions to start an LLC. He's cited by Entrepreneur Magazine, Yahoo Finance, and the US Chamber of Commerce, and was featured by CNBC and InventRight.
 
Matt holds a Bachelor's Degree in business from Drexel University with a concentration in business law. He performs extensive research and analysis to convert state laws into simple instructions anyone can follow to form their LLC - all for free! Read more about Matt Horwitz and LLC University.