You have options for structuring your business entity as a real estate agent. Here are the types of business structure you can use, their differences, and the pros and cons.
Key Takeaways
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Sole proprietorships give you flexibility, but your personal assets aren’t protected
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LLCs and PLLCs give you liability protection, and you have options for how you want taxes to be handled
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Partnerships allow you to share responsibilities with other owners
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Corporations give you lots of protection and can be great for agents who want to grow or have employees
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Professional associations help you avoid self-employment taxes and are for licensed professionals
As a real estate agent, you always want to be sure you’re handling your business in the most cost-efficient way possible, and that means ensuring you’ve chosen the right legal entity. Beyond legal considerations, you need to know what your tax responsibilities and liabilities will be. The type of entity you choose will depend on the size of your business, whether you have or want to have employees, and other goals for the future.
The type of real estate business structure you choose matters for your ongoing accounting tasks and business taxes each year. Here is your guide to each type of entity and the pros and cons for real estate agents.
Sole proprietorships are the most straightforward option for agents working as independent contractors. Under this structure, you have to pay extra self-employment taxes, and only you are responsible for legal issues, should they arise. This means that if a client sues you, your personal property and assets are involved.
However, the big pro of this structure is its simplicity. It’s a great option for real estate agents who want to work without much fuss and may not be trying to grow their individual business. You have lots of freedom, and there are no fees involved to incorporate the business. Many agents start out as sole proprietors.
Limited liability company (LLC)
A limited liability company (LLC) is another common option for real estate agents. These entities offer liability protections so that if your business is sued, your personal assets are protected. It separates the business from you as an individual. This is why many agents choose to do this rather than simply run a sole proprietorship. These businesses can be treated as sole proprietorships, partnerships, or corporations as far as tax implications.
Similarly, you may want to create a PLLC, which is a professional limited liability company. This applies to licensed professionals, including real estate agents.
In general, for tax purposes, single-member LLCs or PLLCs are taxed as a sole proprietorship, and multiple-member LLCs – those with two or more members – are treated as a partnership. Sometimes agents decide to treat the LLC as an S corporation to avoid the additional self-employment taxes.
Partnership
A partnership is another type of business structure to know. These are formed when two or more people share ownership of a business, and general partnerships are for those who want everything to be divided among the owners equally.
The partnership needs to file a tax return each year, but taxes are passed through to the owners, who report them on their individual returns. The pros of partnerships are that the owners share responsibilities and the partnership itself doesn’t pay taxes, but each partner is liable for the debts of the other partner.
Corporation
You may consider incorporating your business to form a C corporation or S corporation. The pros of going this route are that you have that liability protection that separates you from your business. You can also set up benefits programs and retirement plans for employees under these entities, so they can work well if you are growing your business and have other employees working with you.
The cons are that you have more tax and reporting responsibilities. C corporations have to pay taxes on the business level, and shareholders have to pay taxes on dividends they receive, so sometimes double taxation is a reality for these entities.
Professional association
A professional association (PA) is a common option for real estate agents, and many states require you to form a PA or a PLLC when you become a fully licensed professional. It allows you to be taxed as a corporation, and you can limit the self-employment taxes you have to pay.
As a sole proprietor, you’re operating under your name, and you have to pay self-employment taxes, an additional 15.3%. When you set up an LLC or PA and elect to be taxed as an S corporation, you limit those taxes. Once you’re netting over $30,000 or $40,000 in commission for your business, it may be a good idea to go this route to pay less in taxes.
Choosing the right real estate business structure
It’s important to point out that “pass-through entities” are those where the business itself doesn’t pay taxes, and income is passed through to your personal tax return. These include sole proprietorships, partnerships, LLCs, and S corporations. C corporations, on the other hand, have to pay corporate taxes. These are important considerations when you are deciding which option gives you the most tax benefits.
Forming an LLC may give you the most flexibility while still giving you liability protection. You can select an LLC partnership, LLC with S corporation or C corporation election, PA, or PLLC. The PA and PLLC options are very common for real estate agents.
Talk to a professional about setting up your business
It’s not always easy to know which kind of real estate business structure you should or need to set up. It will depend on your state’s laws, your goals, your business’s size, and how much protection you want to have.
The experts at Franco Blueprint are here to guide you through these considerations and help you make the right choice. We help clients with setting up their business, managing taxes, and automating accounting processes.
Get in touch with Franco Blueprint to schedule a free consultation today.