Hi Eric,
Being a landlord "is" a business, but not in the same sense that your local restaurant is a business.
Both SCH C income and SCH E income are business income. But here's the difference.
SCH C income is income you earn by going out and actually "do something" on a recurring basis to actually "earn" that income. SCH C income is also subject to the additional 15.3% self-employment tax, on top of the "regular" tax you paid on that income. Basically, the self employment tax is the employer's side of your social security and Medicare accounts, so it's credited directly to your account. Additionally, SCH C income can be used in figuring your maximum allowed contribution to an IRA.
SCH E income is referred to as "passive" income. That's because you don't go out and "do" anything on a recurring basis to earn that income. Basically, all you do is "sit there" like a knot on a log and collect that rental income every month, week, or whatever the payment schedule is. While you also pay "regular" tax on this passive income, it is "NOT" subject to the additional 15.3% self-employment tax, and does "NOT" count for anything towards your social security or Medicare contributions. Additionally, since passive income is not "actively earned", it also does not count for inclusion when figuring your maximum allowed IRA contributions.
Now as for the legal ramifications, that's already covered in my original answer. But if you have two or more people who own a rental property who are not married to each other and are not filing a joint return, then you form a partnership, not an LLC of any type, be it a single member LLC or multi-member LLC.
Now both a multi-member LLC and a partnership file the 1065 Partnership return reporting all the rental income/expenses on SCH E as a part of that 1065 partnership return. Each partner gets issued a K-1 which they will need for their individual personal tax returns, and the values entered from the 1065 K-1 will be on page 2 of the SCH E on their personal 1040 tax return. So if you form a multi-member LLC, the income is still passive. Additionally, as stated in my answer above, I seriously doubt the mortgage holder will allow you to transfer ownership of a rental from the one or one's who are listed on the mortgage and the deed, to the LLC anyway. Lenders are in business to make money, and they would rather you "sell" it to your LLC so they can benefit from the closing costs and other fees you'd have to pay.
