When you work as a Real Estate Commissions, you work for yourself. The question of whether an LLC for real estate agents is the best company structure for them naturally arises in the minds of many agents.
Or until you visited your real estate CPA’s office the last time you had your taxes done, you had not thought about business companies or Real Estate Commissions company structures. Your real estate accountant proposed the formation of an LLC.
You began researching to determine the best business structure for your real estate company and came across this article.
In this article, we’ll discuss the factors you should consider when setting up a real estate LLC, the benefits and drawbacks of a real estate agent LLC if you think of alternative legal structures, and more.
We must first issue a disclaimer before continuing. It is inappropriate to rely on Dolinski Group or this material as legal or tax advice. This information is offered for amusement purposes only. We suggest discussing your case with a certified public accountant or local attorney.
Why Do Real Estate Agents Need An LLC?
A real estate agent could want to establish a limited liability corporation, or LLC, for two significant reasons. The first one is for legal defense. The second one is for tax benefits.
Home purchasers and sellers sue real estate agents for a variety of reasons, including:
A customer claims that a real estate agent and broker did not follow the terms of their contract, which is known as a breach of contract. For instance, a customer could take legal action if an agent violated the agreement’s requirement that they make proposals.
When a customer believes a property was misrepresented, a lawsuit is filed. Examples include when an agent represents a property as being more valuable, in better shape, or withholding facts.
Breach of Duty: You have a fiduciary duty as an agent. In other words, you must behave in the client’s best interest. A customer may file a lawsuit if they believe you acted improperly.
There are additional justifications for forming an LLC, but they seldom pertain to Real Estate Commissions brokers and how most conduct business.
Let’s investigate the primary arguments to help you decide whether an LLC is the best corporate form for your Real Estate Commissions firm.
The LLC could protect agents.
Real estate is a frequent target of litigation since it is a highly regulated business with significant financial transactions. You can face legal action from creditors or workers and lawsuits from purchasers and sellers.
You risk being sued as a real estate agent and independent contractor. Your assets may be in danger if you don’t have a formal legal structure, such as an LLC.
Agent Jon, for instance, has $30,000 in his real estate bank account and $20,000 in his personal bank account.
Mr. Seller has filed a lawsuit against Jon, and without an LLC, the $30,000 in his company account and the $20,000 in his report are both in jeopardy. He might be made to shell out $50,000 to cover his client’s losses or damages.
Jon’s assets, in this case $20,000, may be shielded from the lawsuit if he formed an LLC for Real Estate Commissions agents and abided by the requirements. Jon’s liability is capped at $30,000 or his company’s assets.
Did you note how that last line was phrased?
Jon’s responsibility is constrained.
Thus, an LLC is a Limited Liability Company. The objective is to keep your obligation to the business. In principle, the only things at stake are a real Real Estate Commissions company assets.
Real Estate Agent LLC Protection
To secure their assets, including their bank accounts, homes, cars, and other property, real estate agents will thus set up an LLC for peace of mind.
Real Estate Agent LLCs Can Be Complicated
Here’s the problem: Real estate agent LLCs get complex when we examine many rules and regulations.
Only brokers are authorized to trade real estate, according to the law. Under the authority of a broker’s license, real estate agents or licensed salespeople may broker real estate.
Consequently, the real estate broker is a party to many contracts that agents and clients sign. This results in certain distinctive traits.
The real estate agent may be liable, but the broker is more than likely responsible. In other words, the broker can face more legal action than the real estate agent.
This means that figuring out your real estate obligations might be challenging. Because of this, we advise speaking with a local lawyer to assess your potential risks and decide if a limited liability corporation or LLC is the best option for you.
Can An LLC Receive A Real Estate Commission?
An unlicensed LLC cannot get a real estate commission in most states, including Michigan. The majority of states prohibit an LLC from having a real estate license. A salesperson license may only be held by a real estate agent or person, so commissions can only be given to real estate agents.
Of course, this regulation alters if you possess a broker’s license. An organization or a person may get support. A real estate company’s associate broker might form a business, apply for a broker’s license, and request payment from the LLC.
Since an LLC cannot possess a real estate license, the broker pays the real estate agent, who handles the transaction. This raises the issue of whether a distinct entity is genuinely created.
It’s feasible that this will cause the “corporate veil” to fall. Your assets might be in danger even if you establish an LLC.
LLCs Provide Tax Benefits
Saving money on taxes is the second reason real estate brokers create an LLC. A limited liability corporation provides tax savings and flexibility for real estate brokers.
Generally, real estate agents are considered pass-through companies unless they form an LLC and choose a different tax classification.
Real estate agents’ profit or loss is thus “passed through” to their tax return. Then, their income is subject to the employer and employee portions of Social Security and Medicare taxes and the individual’s local, state, and federal income tax rates, depending on the circumstances.
Moreover, an LLC has the option of electing to be taxed as a S Corporation. To make this choice, a real estate agent must fulfill several standards.
However, if a real estate agent chooses S-corp status, they are still responsible for paying income taxes, Social Security, and Medicare on their salaries.
Profits distributed as distributions are exempt from Social Security and Medicare taxes and are only subject to income tax. They are reducing taxes by around 15%.
The IRS knows the tactic because company owners will pay themselves below-market salaries and withdraw the whole sum as a profit distribution.
Specific guidelines must be adhered to. Failure to do so might lead to an audit and a GIANT bill from the IRS with penalties and interest.
The truth is that only a few real estate brokers are eligible to profit from the tax advantages.
Are LLCs Necessary For Real Estate Agents?
Okay, now that we’ve discussed the benefits of forming an LLC, allow me to outline a few situations in which doing so in real estate often makes the most sense.
- You make enough money to pay yourself a decent salary and make a profit;
- You have workers that you pay (usually excluding other real estate agents if the broker is paying them);
- You invest in real estate as well;
- You wish to safeguard a lot of your possessions;
- You will want security in the case of a lawsuit from an employee, even if there is some ambiguity over the protection an LLC may give in the event of a lawsuit from a buyer or seller.
- The Alternative to Real Estate Agents Operating as Sole Proprietors
- You may have decided that you don’t want to register an LLC as a real estate agent, but you’re still determining your options.
Real estate brokers are automatically regarded as sole proprietors or operators. You may become a single owner without taking any action.
You may need to submit a D.B.A. if you want to advertise to the public under a different name, such as “Jon Real Estate Group.”
Due to its simplicity and low cost, this strategy is chosen by many real estate brokers. Articles of Organisation and an annual filing must be submitted annually by real estate agent LLCs. Although the fees are minimal, they may mount up if you’re a rookie real estate agent trying to keep your startup expenditures under control.
Investigate Insurance Options to Reduce Liability
You may or might not be a good fit for an LLC. How can you reduce your responsibility and safeguard your assets if you decide against forming an LLC?
LLCs do not guarantee safety, particularly if you combine your bank accounts’ cash rather than keeping your resources separate. What can you then do?
It is advisable to think about your insurance alternatives as a real estate agent to offer some protection.
For your real estate firm, you should consider the following three forms of insurance:
Insurance for mistakes and omissions
Personal Liability Insurance or Umbrella Coverage
Organisational Liability Insurance
The most popular insurance in the real estate sector is undoubtedly errors and omissions insurance (E&O).
This defends against some of the most frequent lawsuits real estate brokers encounter, including paperwork mistakes, information omissions, etc.
Most real estate brokers’ insurance policies include some projection for their agents.
Your broker’s policy will determine the specifics of your coverage. Make sure to ask them. In some instances, there was no price for E&O coverage, but the agent was still obliged to pay a $1,000 deductible in the event of any legal action.
You buy umbrella plans and personal liability insurance to safeguard your assets. If you’re found to be responsible for any injuries or damage, the insurance may cover the costs rather than putting your house or other personal assets at risk.
Most Effective Business Model For Real Estate Agents
Real estate agents will need to choose their unique business model. A real estate agent who is just starting can handle a different organizational structure than a real estate agent managing a large workforce.
Generally, most solo or new real estate brokers run their business as a single proprietor. Does that mean it’s the best choice for you, then? Maybe. Perhaps not. It would help if you spoke with an accountant and an attorney.
Teams working in real estate are more likely to form LLCs and run them.
Do you want to know how to start a real estate business?
There are various phases involved in starting a company. You must think about your legal structure, tax status, bank account opening, etc.
We’ve developed an “Agent Crash Course” course that explains how to set up your company, keep track of your finances, and assemble a group of advisers to support you along the road.