For a real estate agent, setting up an LLC is absolutely essential in forming your real estate business. The majority of real estate agents work as self-employed, independent contractors; even those agents who work for brokerages operate in a similar capacity, filing 1099 forms for their tax returns.
Independent contractors usually have more freedom and a greater earning potential than salaried employees, but are also weighted with more responsibilities under the law. For example, 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 if you’re not protected by an LLC.
Advantages LLCs Give Real Estate Agents
Aside from limited liability protection, there are many advantages to having an LLC if you’re a real estate agent. Some great examples are:
- 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.
- Separating Business and Personal Finances. A common but hefty mistake when starting out as a Real Estate Agent is to combine business finances with personal finances, such as when they put business expenses on their personal credit card! Having an LLC alongside a business bank account significantly lowers your chances of personal liability that might occur through the commingling of funds.
- Raising Professional Credibility. Selling or buying a home is such a large commitment and a huge life-changing event! Potential clients will absolutely want to work with someone they perceive as being a professional – someone they can trust with all the unknowns and changes they’re about to face. Operating through an LLC and owning a business name can show that you are a responsible, legitimate business person.
There are so many reasons an LLC can serve as a great benefit to your real estate career. Not setting one up would, in most cases, be doing yourself a great 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, such as:
- 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 as well as 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.
LLCs are a necessary asset for any small business owner, a protective barrier to separate your personal finances and interests from your business expenses and endeavors, while also legitimizing your business with clients, other business as the government. Take the time to investigate how to license yourself and consider it an essential piece of starting up your new work.