It’s commonly know that real estate investors/owners often form an LLC – Limited Liability Company – or corporation. But it isn’t as well known why agents would want to form an LLC or corporation for their own business.
Real estate investors often form LLCs after purchasing one or more properties. Holding property through an LLC can insulate investors’ personal assets from judgement in lawsuits that might levied against them.
However, it can be just as important for real estate agents to separate their personal assets from their business income as it is for investors.
Why? Because their profession, like most businesses, has elements of risk in its day-to-day operations. Risk that create the need for strategic liability protection and insurance. Forming an LLC can be a smart choice for companies who require liability protection that goes beyond the scope of insurance alone.
Real Estate Risks
Real estate agents engage in a vulnerable line of work. Many clients expect their agent to fill many roles at once – lawyer, CPA, accountant, therapist, and friend. High-pressure environments that involve such intimate relationships are inherently filled with risk, which, if not handled correctly, can lead to lawsuits.
Just as owners might be sued for incidents occurring on their property, so too can real estate agents be sued by their clients.
Agents most commonly get sued for misrepresenting the value of a home or appearing to have breached any agreement made with client or potential buyer, although there are other factors to consider as well.
Routine situations for a real estate agent, such as using their personal vehicle to drive clients to properties, are also potentially hazardous.
Real estate agents typically protect against lawsuits by carrying errors and omissions insurance. This can protect the agent up to a certain point. However, once the insurance limit has been reached, there is nothing further to guard the agent’s personal assets from judgement.
Here’s a sobering list of all the ways you might possibly be sued (http://www.reiclub.com/articles/10-ways-get-sued). It’s not pretty.
Notice that the first item on the list is doing business as a sole proprietor.
If you work as a sole proprietor carrying only errors and omissions insurance, you will be held personally responsible for all debts and lawsuits incurred by the business. Forming a general partnership may leave you even more susceptible to bad debts, even if your partner files for bankruptcy.
Here’s a more cheery list of ways that real estate agents can avoid being sued (http://realtytimes.com/rtpages/20041115_avoidsuit.htm). A lot of the items are just plain old common sense, however one items is definitely of interest:
Real estate agents could also consider becoming a professional corporation or a professional limited liability company. Though this will not keep you from getting sued, it can minimize the effect on your personal finances if you should ever get sued and happen to lose. Additionally, there are tax benefits that can be achieved if you set up a properly structured professional corporation.
This is where an LLC becomes important. An LLC combines the structure of a corporation with the routine of a partnership. Like with a corporation, members of an LLC cannot be held accountable for the company’s debts. Unlike a corporation, LLCs are not required to have strict operational procedures, such as board meetings and minutes. Forming an LLC can get rid of a lot of the headaches associated with other business types.
By transitioning your company to an LLC you will gain the following benefits:
- Extended asset protection
- Flow-Through Taxation
- No Self-Employment Tax
- 100% of paid health insurance premiums eligible for deduction.
- Unlimited members
In addition, doing business as an LLC increases your company’s professional cachet and could lead to an increase in new clientele.
Whether you’ve been working as a sole proprietor or have just started your real estate career, taking steps towards becoming an LLC or corporation could be a sound choice.
Articles like this can be helpful on the broad strokes1. But every situation is unique. To make the right choices, it’s critical that you speak with your accountant and attorney to determine the direction that is best for your individual business.
1 Sorry, but this is as much for your good as it is for ours. Disclaimer: Neither Formation Solutions, Inc., nor any of its owners, employees, agents, or affiliates for whom it is responsible provide any legal services, legal representation or legal advice. The information and suggestions contained herein have been developed from sources, including publications and research that are considered and believed to be reliable but cannot be guaranteed insofar as they apply to any particular individual, corporation, or taxpayer. Moreover, because of the technical nature of this material and the fact that laws and statutes are never static, but ever changing, the assistance of a competent, qualified lawyer or accountant is recommended when implementing these documents. This material does not constitute legal advice and should not be taken as or used as a substitute for the advice of competent legal counsel. Formation Solutions, Inc. specifically disclaims any liability, loss or risk, personal or otherwise, that is incurred as a consequence of the use and/or application of the information in these documents.