LLC for Real Estate Agents: Everything You Need to Know
LLC for real estate agents refers to the types of LLCs real estate agents can use to conduct their business and it provides businesses protection.3 min read
2. Advantages LLCs Give Real Estate Agents
3. Other Considerations After Forming an LLC
Updated June 26, 2020:
LLC for real estate agents refers to the types of LLCs real estate agents can use to conduct their business. One of the main values of such entities is to provide protection from business-related lawsuits, debts, and accidental commingling of funds, and for this business, you can select an LLC, partnership, LLC with S corp or C corp election, Professional Association (PA), or Professional LLC (PL). Which one you go with will depend on the size and nature of your company, along with your preferred tax situation, but for real estate agents, the PA and PL are the most popular.
The LLC for Real Estate Agents
For a real estate agent, setting up an LLC is a key step in forming your real estate business. The majority of real estate agents work as self-employed, independent contractors, and even those agents who work for brokerages tend to do so in that capacity, filing 1099 forms for their tax returns.
Independent contractors tend to have more freedom and a greater earning potential than salaried employees, but they also have more responsibilities under the law. For instance, if a home seller or buyer files a lawsuit against you, as an independent contractor operating without a corporate structure separate from you, you could be considered to be liable personally for any damages. This could result in losing your home and personal savings, but not if you are protected by an LLC. Hence the value in taking the trouble to set one up for yourself.
Advantages LLCs Give Real Estate Agents
Aside from limited liability protection, there are many advantages to having an LLC if you are a real estate agent. Some of them include:
- Tax Flexibility. Having an LLC allows you to take the S Corporation election with the IRS, which can save you money on self-employment taxes.
- Low Audit Risk. According to Accounting Today, an LLC with S Corporation election will likely give you a lower risk of being audited. According to them, in 2018 only 0.22% of S Corporations were audited.
- Separating Business and Personal Finances. A big mistake real estate agents often make when starting out is to combine their business finances with their personal finances, such as when they put business expenses on their personal credit card. You can avoid this by having an LLC with a business bank account and thereby lower your chances of personal liability that might occur through the commingling of funds.
- Raising Professional Credibility. Because selling or buying a home is such a large commitment, potential clients will likely want to work with someone they perceive as being a professional. Operating through an LLC can create this perception. Having a business name on a contract or business cards can show that you are a responsible, legitimate business person, and thus you may receive more business.
For all these reasons and more, an LLC can serve as a great benefit to your real estate career, and not setting one up would, in most cases, be doing yourself a disservice.
Other Considerations After Forming an LLC
After you form an LLC for your real estate endeavors, there are some other actions you can take that can yield further benefits. These include:
- Getting an Employee Identification Number (EIN).
- Getting an S Corporation election for your LLC with the IRS. Doing this can maximize your tax flexibility. Fill out IRS Form 2553 to do so.
- Opening a business bank account. This will keep your personal finances and business finances separate and also improve your credit rating.
- Updating your W-9 Form with your broker. Indicate your new bank account and entity name.
- Transferring your personal real estate license to your LLC, if your state lets you.
- Checking with the regulatory commission or board that awarded your real estate license about any fees, qualifications, or restrictions pertaining to your LLC.
- Being aware of any additional fees or filings. Incorporation fees can run from $40 to $550. An annual report with a filing fee may also be necessary.
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