What Is a Professional Association?

Professional associations (PAs) are corporations for certain licensed professionals like real estate agents. Learn the benefits and how to set one up.

Key Takeaways

• A professional association is a type of corporation for real estate agents that allows them to obtain liability protection and other benefits

• Steps to get started:

  1. 1. Get a tax ID number

  2. 2. Get approval for the professional association

  3. 3. File with the Secretary of State

  4. 4. Create an S corporation

  5. 5. Create a business account

Choosing the right business structure helps ensure your real estate business is on track for long-term success. A common option is the professional association (PA), and in some states, you may be required to set up a PA or PLLC if you are a licensed professional, instead of a corporation or LLC.

Incorporating your real estate business can give you lots of benefits related to taxes, credibility, and liability protection. It’s a step above a sole proprietorship and can give your business more legitimacy.

So, what is a PA and how do you set one up? Here’s everything you need to know.

What is a PA?

A PA is an option for real estate agents when setting up their business structure. Note that some states require fully licensed professionals to form either a PA or a PLLC (professional limited liability company) instead of a standard corporation or LLC so they have that professional designation.

PAs are corporations, and the process of setting one up is similar. PAs can elect to be taxed as an S corporation, so their members won’t have to worry about paying self-employment taxes like they would as a sole proprietor.

5 benefits of setting up a PA

Setting up a PA or PLLC gives you lots of benefits when hustling as a real estate agent. Let’s cover some of the biggest:

1. Pay less in taxes: One reason to go this route if you’re a real estate agent is to lower your tax burden. Compare a PA to a sole proprietorship: The latter requires you to pay an additional self-employment tax of 15.3%, whereas a PA can limit those taxes. This is an especially important consideration once your business starts bringing in more money. Some recommend creating a PA when you earn $30,000 or $40,000 in net commission.

2. Liability protection: Working as a sole proprietor can be great for a time because there aren’t many responsibilities and you report income on your personal tax return. However, the downside to a sole proprietorship is that you are personally liable should there be any claims made against you. This means that your property and assets aren’t protected in a lawsuit. Forming an LLC or a PA gives you an added layer of liability protection, so you and your business are separate.

3. Lower risk for an IRS audit: Working as an independent contractor agent could mean you’re at a higher risk to be audited by the IRS. When you incorporate your business, you’re much less likely to have that happen. One study found that an LLC or corporation being taxed as an S corporation was 10 times less likely to be audited than a sole proprietor using Schedule C.

4. Gaining credibility: When you have the PA distinction, your business appears more credible and professional. You may be able to get more clients, listings, and sales when you make the decision to create a PA.

5. Protecting the brand: Finally, incorporating your business under a certain name means that you’re protecting that name, so no one else can use it to incorporate.

There are pros and cons to every time of business, but a PA is one of the better options out there when you’re a licensed professional. Next, we’ll walk through the steps to set up a PA.

How to set up a PA

Now you may be convinced that this type of business structure is right for you. Where do you start? Here are steps to take to set up a PA:

1. Get a tax ID number: You will need to apply to get a tax ID number for your business, so you have a tax entity separate from your social security number.

2. Get approval for the PA: Only licensed professionals can form PAs or PLLCs, and they can be formed by a single agent or group if they all hold the same type of license. These requirements vary by state. You’ll need to show proof of licensure to the licensing board, which then must approve the association.

3. File with the Secretary of State: You then file your articles of association with the Secretary of State to form your legal business.

4. Create an S corporation: PAs are C corporations when they’re created, which means they’re subject to double taxation (meaning the business pays taxes and shareholders also pay taxes on dividends). But, you can elect to be taxed as an S corporation, and the process is pretty simple. You just need to file Form 2553 within 60 days of forming your business.

5. Create a business account: It’s always wise to create a separate business account for your PA for all of your commission income. As an LLC or PA, you cannot use a business account for personal needs as well.

Remember that the process varies by state, so make sure you talk to a professional about your requirements.

Why work with Franco Blueprint?

When you need assistance setting up your business, Franco Blueprint is here to help. We also help you set up the right accounting systems, so your business starts out more efficient. Automate your accounting process, manage your taxes, and get paid faster, all with the help of our team.

Contact Franco Blueprint to learn more about how we help business leaders like you get everything set up the right way.