Why Real Estate Agents Form Corps or LLCs for Their Own Business

by Matthew Burgess on December 11, 2009

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.

house-for-sale-signReal 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.

risk-cubes-stackedAgents 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:

11. Incorporate.

stock-certificate-closeup-1Real 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.

Final Word

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.

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  • Anonymous

    You can set up a limited liability company and then make the Subchapter S election to have the limited liability company treated for income tax purposes as an S corporation. Many knowledgeable accountants and attorneys now recommend the limited-liability-company route because limited liability companies are easier to “maintain” than regular corporations.

  • http://www.matthewburgess.com/ Matthew Burgess

    Yes, I agree that many CPAs and accountants recommend forming an LLC for ease of maintanance. But we've not seen anyone form an LLC, then go through the trouble of electing to be taxed as an S corp.

    To accomplish this, you'd have to take an extra step. First, after forming your entity as a Limited Liability Company, you'd have to file an IRS Form 8332 elect to be taxed as a corporation, rather than as an LLC. Then you can file the IRS Form 2553, the Election by Small Business Corporation, to be taxed an S corporation.

    But I can't imagine why anyone would go to this trouble, because you end up right back at being taxed in a pass through manner. It's a big circle.

    I imagine there may be a difference in taxation if there is only one LLC member (owner), in which case the entity is considered a “disregarded entity” by the IRS. In that case, there may be a distinction with S corp taxation that is important, but we've never seen anyone do that, nor ever heard a CPA recommend it.

    We've seen our clients file the Form 8832, but only when they wanted the compliance simplicity of and LLC but they wish to be taxed as a *C Corp*. It's rare, but we've seen it.

  • Guest

    I'm a Realtor in Seattle, Washington – would you recommend an S-Corp or LLC? I've heard that S-Corps have better tax incentives since you can take part of your pay as salary (say, $50,000), pay the self-employment tax of 15.3% on that amount…and then take the rest as a distribution. What do you think?

  • http://www.matthewburgess.com/ Matthew Burgess

    What you're contemplating is something that we see quite often. There can be many tax benefits to forming a business entity. We can't recommend one form over another, as that is an issue for a CPA or an attorney. I can say that tax treatment for S corps and LLCs will be both a federal (IRS) issue and a state-by-state issue.

    For example, to the best of my knowledge, in California, LLC's are taxed on gross receipts, not net profit. Up to a certain level of gross revenue (I believe it's $200k or 250k), you pay the minimum franchise tax. But over that level, an LLC pays a measured tax on gross receipts. So as an LLC in California, you could be at breakeven or a loss, and you're still getting hit with a big tax bill for high gross receipts.

    So the question of “should I form an LLC or an S-Corp?” often comes down, in California, to how much gross revenue you expect to earn. We've heard from many CPAs who actively discourage their clients from forming an LLC in California, because they feel that the client will get killed on state taxes unnecessarily.

    I can't say if there is a similar situation in Washington. But you should talk to an expert locally. My recommendation is that you speak with a CPA that knows your state's tax code.

    You can always Google your way to hundreds of websites that give tons of information. But I would say that you should be careful to rely on website articles for these decisions. They are writing for a broad audience, and every situation has nuance. Plus, all those sites are probably selling you something (or worse, just writing junk articles to draw in traffic and earn money running ads).

    In my opinion, the best thing is always to sit down with a qualified CPA to talk about your tax issues.

  • lawinc

    If you’re going to start a business with somebody else,. Forming a partnership is usually the most common approach since it’s easier and cheaper to manage than the corporate cousins; namely the Corporation and Limited Liability Corporation.

  • TimT

    I've repeatedly heard that a partnership is the single worst entity you could form.

  • http://www.matthewburgess.com/ Matthew Burgess

    There are a myriad of web sites that are just a few Google clicks away that will tell you “the answer,” but I always recommend that you have a conversation with a business attorney on questions like this. Each situation is different, and the law is always changing (and varies by state).

  • http://registerllcdirect.com/ Register LLC Direct

    I just wanted to comment your blog and say that I really enjoyed reading your blog post here. It was very informative and I also digg the way you write! Keep it up and I’ll be back to read more in the future.

  • hank

    Under California law, an LLC can engage in any lawful business activity but may not perform a professional service that requires a license, registration, or certification under the California Business and Professions Code unless specifically permitted under the law. It's important to note that at this time a real estate brokerage may not be set up as an LLC. (Cal. Corp. Code § 17375. 87 Ops. Cal. Atty. Gen. 109, Opinion No. 04-103 (2004).

    So it seems an LLC is not the appropriate business entity for a pure brokerage.

  • Anonymous

    Real acreage investors generally anatomy LLCs afterwards purchasing one or added properties. Holding acreage through an LLC can insulate investors’ claimed assets from judgement in lawsuits that ability
    levied adjoin them.

    Community Association Management

  • http://www.propertyinsantacruz.com/ Chas Wilkie

     That was the reason, god. They are so mean. Like they are fraud by them self.

  • Will

    Hi

  • Will

    Hi, my question is 2 parts.
    1) I am about to become a real estate licensed professional and I wanted to know if I should form an LLC or a corporation so that I can deduct my expenses when tax season rolls around. Or when should I form some form of corporation? I am currently being paid a small salary as I am being trained but I wanted to form a corporation and have them make the check to my “corporation” so that I can try to use my meals and advertising and other expenses to be written off. Thus, paying less taxes and making more money.
    2) I am being paid a small amount of money as I train per month $1,500.00 The company I work for is a small/medium size with revenue over 1.5 million a year. They were wondering from a tax point-of-view, can they pay me more and “write that off”?

  • Anonymous

    Hi Will. OK, I know this isn’t the answer you were hoping for here, but I would recommend that you sit down with a qualified CPA and talk about this. Your questions look to me like tax issues, and an accountant would be able to tell you which form would help you optimize your situation and protect you according to your goals. And, I’ll add, in our opinion, its always a good idea to speak with a business attorney about these things.

  • Leon

    Great article. I totally agree with the benefits but curious on how someone would get away with not paying self employment taxes. Its a flow through entity and most real estate agents would be considered an active member due to the number of hours they would put in at minimum to make money. Please explain since you note that its a benefit. people can be lead the wrong way by this statement. Thanks

  • Christina

    If it is an LLC and has elected for tax purposes to be taxed as an S-Corp they would not pay self-employment taxes

  • Shanon Feliciano Jr

    Question if I form an LLC or entity but my commission checks are cut to me not my LLC, and I deposit my checks into my LLC would that be legal as when my real estate company 1099s me it will show me and not my entity so I believe on my schedule C I would have to show my 1099 income from my real estate company that I am an agent for. Thus would that cause an Audit as in Hawaii the commissions must flow through the companies, do you know a way around this?

  • Anonymous

    As for what is or is not legal, you’ll have to consult with an attorney. For the practicalities of the situation, I’m not sure how you’d even be able to deposit a check made out to one entity (you, individually) into a bank account for a different entity (an LLC). That is, I doubt a bank would even allow that. And if you’ve been 1099′d, a copy of that 1099 would have been filed with the IRS also. Please consult with an attorney and a CPA on these issues.

  • Anon

    An LLC does pay self-employment tax on net income. This simply flows through to the owner/member as self-employment income if they are an active member.

  • YachtBroker

    Hey there Matthew, I know this thread is a bit old but I’m sure the same rules apply to date…

    As a yacht broker in Florida, I’ve had two different opinions from CPAs. One CPA says definitely an LLC, and most recently a CPA told me that definitely an S-Corp since as a single member LLC the IRS can tax you like a C-Corp. I am thoroughly confused at this point. Why wouldn’t a single member LLC just add someone else (friend or family) as an additional member to the LLC in order to avoid the board and minutes and filings of a corp and keep the simplicity of an LLC??

  • Steve

    The S Corp MUST pay reasonable compensation to its owners (for their work in the business). You CANNOT escape payroll taxes simply by being an S Corp, unless you are a non-participating owner

  • http://www.augustagoldira.com/ Augusta Precious

    The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.After initial needs are met—enough food, shelter, comfort—there is no correlation between money and happiness. That’s a difficult thing for people to believe.The money that we possess is the instrument of liberty, that which we lack and strive to obtain is the instrument of slavery.
    http://www.augustagoldira.com/home-storage-gold-ira-introduced-augusta-precious-metals/

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