31 Jan Do You Need an LLC for Your Real Estate Business?
As an independent real estate agent, there’s no doubt you have a lot on your plate. Thinking about your business structure may be the last thing on your mind, but it actually should be somewhere on top of your to-do list. The good news is that once you set up your structure, you can rest easy knowing your business and assets are organized appropriately.
Why Consider a Corporation or LLC for Your Real Estate Business?
Just because you belong to a brokerage does not mean you are organized in business formation sense. Your brokerage gives you a 1099 at the end of each year, not a W-2, so you are considered an independent contractor. This means that in the eyes of the government, and more importantly, the courts, you are the sole owner of your own real estate business.
This really comes into play if there are ever any legal actions taken against you. A buyer might sue you, claiming you misrepresented them in the purchase action of a property. Or a seller might claim damages saying that your marketing methods or failures caused a loss of money on the sale. If these things happen, and your state real estate commission allows you to sign contracts in your entity name vs. your broker’s name, then you alone are responsible. In an un-incorporated business structure such as a sole proprietor, your personal finances, retirement accounts, and even your home could be on the line to pay off damages.
This is why many independent real estate agents consider incorporating or forming an LLC for their real estate business. Many benefits can be gained, and one of the most important is that your personal property is not considered accessible for business claims or losses.
Benefits of a Real Estate LLC or Incorporation
The benefits of choosing to incorporate your real estate business or form a real estate LLC structure extend beyond personal financial protection. Here are some other important benefits of choosing an LLC or corporation for your real estate practice.
- Tax Savings. One advantage of forming a real estate LLC is tax savings. As an LLC or s corporation, you can choose S-Election on your tax form. This will give you important exemptions in self-employment tax that are not available to sole proprietors or partnerships. In fact, many independent real estate agents and investors find real estate LLC tax advantages to be one of the most valuable aspects of incorporating.
- Positioning for Success. You’ve heard of “dressing for success,” but what you may not know is that choosing to form a real estate LLC or corporation can position you for success. Many agents find themselves more active and self-reliant after they incorporate because they take their business more seriously, and become more organized by keeping their personal and business affairs separate. In addition, when you let your customers know you are incorporated yourself, you gain an added layer of credibility, which could potentially lead to more listings and sales.
- Additional Credibility and Brand Protection. Your profession has many designations that carry prestige: GRI, CRS, etc. and when you have LLC or Inc. after your name, you will gain instant credibility with clients and this could potentially lead to more listings and sales. In addition, once you incorporate with your name in your state, nobody else can use that business name to incorporate.
There are a few common steps that many independent real estate agents take after they incorporate or form an LLC:
- Obtain anEmployer Identification Number (EIN) from the IRS. Click here for more information about obtaining your EIN.
- As a way to maximize tax flexibility and savings, most independent real estate agents who incorporate themselves fill outIRS Form 2553 with an S-Election and send it in to the IRS.
- Once you have your Articles of Incorporation / Organization and EIN number, most independent real estate agents who incorporate themselves open aseparate Business Bank Account to keep their personal finances separate from their business finances. Many banks have promotions that provide incentives to open up new accounts; so it pays to shop around.
- Most independent real estate agents who incorporate themselvesupdate their W-9 Form with their broker indicating their new entity name and bank account. Some brokers require additional forms to change your status. Ask your broker what you need to do to make this transition.
- If your state allows you, most independent real estate agentstransfer their personal real estate license into their new LLC or Corporation. It is important to check with the regulatory board or commission that awarded you your real estate license about any restrictions, qualifications, and fees.
- Additional Filings and Fees: The Secretary of State Division of Corporations of every state charges a fee to incorporate or form an LLC. They can range from $40 to $550. Most state fees for setting up a legal entity are below $200. Contact us for state specific pricing.
Nebraska has what is called a “biennial report” filing requirement. This is a form you submit to the every other year to confirm that your entity is still in business, and confirm who owns the entity.
Nebraska Real Estate Commission or Boards may also has a fee required to verify your license is active when you establish your company and every year following.