Guide to Setting Up an LLC for Real Estate Agents
Setting up an LLC for real estate agents is an important step in building your real estate business. Most real estate agents are self-employed, independent business people. Even if they belong to a brokerage, most real estate agents are not employees; if you receive a 1099 form from your brokerage for tax purposes each year, this means that the government considers you to be an independent contractor.
Why does it matter? As an independent contractor, you often have greater freedom and higher income potential than most employees, but you also have certain responsibilities in the eyes of the law. If a home buyer or seller ever files a lawsuit against you or alleges misconduct against you in a real estate deal, as an independent contractor real estate agent with no legal corporate structure set up for your business, you might be held personally liable for damages. This means your personal savings or even your own home could be vulnerable to being seized by creditors.
Real estate agents can protect their personal assets from the worst-case scenarios of running a business while also enjoying some tax advantages by taking one simple step: setting up a Limited Liability Company (LLC).
An LLC for real estate agents has many of the same characteristics as for any other solo professional, but there are a few advantages of this business structure that make it a particularly good fit for real estate agents:
- Tax Advantages: By forming an LLC for your real estate business, you can elect to file taxes as an S Corporation, which can give you some unique advantages and help you save money on self-employment taxes. To understand how much you could save, check out our S Corp Tax Calculator. The LLC is a flexible business structure that gives you options at tax time — talk to your accountant.
- Lower Risk of Getting Audited: According to statistics cited by Marketwatch, forming an LLC and then filing an S Corporation might help you have a lower risk of an IRS audit. As of 2014, only 0.4% of S Corporations were audited by the IRS.
- Keep Personal and Business Finances Separate: One of the biggest mistakes that real estate agents often make when they are first getting started is combining their personal and business finances, such as using a personal vehicle to drive clients to view properties, or putting business expenses on a personal credit card. Setting up an LLC for your business will let you get a business bank account and help motivate you to truly treat your real estate career like a serious business that is separate from your personal spending. It will also let you build credit under your business’s name in a way that is separate from your personal credit score.
- Enhance your Professional Credibility: Buying or selling a home is a massive transaction and a big commitment, so your clients will typically want to work with a professional real estate agent that they trust. Setting up an LLC (instead of working as a sole proprietor) can often boost your credibility in the eyes of prospective clients. Seeing a business entity name on your business cards, or a business name on a signed contract, helps show your clients that you are a legitimate, responsible real estate professional who is prepared for the risks and opportunities of being in business.
Forming an LLC is an essential step to protecting your personal assets, boosting your business credibility, and perhaps enjoying some additional flexibility and tax advantages. Having an LLC as a real estate agent gives you additional protection and legal support to help you stay productive and focused on serving your clients, making deals and moving your career forward.
Learn more about the LLC and how to set up an LLC for your real estate business.