Why Incorporate a Real Estate Business

Many independent real estate agents think they are already “organized” in a business sense by belonging to a brokerage. However, if you get you a 1099 at the end of each year, not a W-2, you are considered an independent contractor. This means that in the eyes of the government, you are the sole owner of a real estate business operating as a sole proprietorship. This is why it’s important to incorporate a real estate business.

This may affect you if legal action is taken against you. A buyer can sue if they they feel you did not represent them well when they bought the property. Also, a seller might claim damages if they think you caused them to lose money on a sale. If these things happen, and your state’s real estate laws allow you to sign contracts in your name vs. your broker’s name, then you are liable.

Because of this, many agents choose to form a real estate LLC or corporation. There are many legal and tax benefits when you incorporate a real estate business. You can protect your personal property from any potential lawsuits and claim taxes in a different way.

In addition to starting a business as a broker or realtor, many professionals choose real estate as an investment. Real estate investments can cater to specific goals, finances, and risks. Some popular types of real estate businesses include:

    • Wholesale – Real estate wholesalers enter into a contract to buy a property, but then find another buyer willing to pay more to take over the contract. This often requires less cash and poses lower risks, but to succeed, the real estate business must find a new buyer quickly.
    • Flipping – Flipping houses or buildings has become popular due to television shows like Fixer Upper. Flippers buy real estate that needs repairs, fix the property up, and try to resell at a profit.
    • Investment – For people that want a long-term investment, rental properties are great prospects. They result in a steady source of income, but they can also require paying for a mortgage, taxes, and repairs.

Here are some great reasons to incorporate a real estate business:

    • Tax Deductions – Because of the tax bill just passed by Congress, real estate agents that incorporate and have an income above a certain level qualify for new tax breaks. Check out this article from the National Association of Realtors for more info.
    • Personal Asset Protection – 90% of real estate agents are contractors, not full-time employees. When you incorporate, it protects your assets if you sign contracts in your own name. If you are flipping houses or renting them out, you need to shield yourself from any unhappy buyers or renters. Even if you are just renting out your vacation home, you can form an LLC to protect yourself.
    • Better Credibility – When you form an LLC or corporation, banks and other businesses can view you as more legitimate. If you want investors, or you are trying to establish yourself in the community, forming an LLC or corporation is a great first step.

As an independent contractor, owner, or sole proprietor, there are other items to think about when you incorporate a real estate business:

    • Check with Your State – Certain states require real estate agents to form specific types of companies. For example, Florida requires real estate agents to form a Professional Association (PA) or a Professional LLC (PL). Due to this, you should check with your state’s license board to find out what you need.
    • Obtain an EIN (Employer Identification Number) – Like a Social Security Number, an Employer Identification Number (EIN) is a nine-digit number that identifies a business. The Internal Revenue Service (IRS) issues EINs and often requires them for all corporations, LLCs, and businesses with employees.
    • Consider an S Corp – Due to increased tax flexibility and savings, many independent real estate agents who incorporate create an S Corp. To do this, fill out IRS Form 2553 with an S-Election and send it to the IRS.
    • Update Your W-9 and Transfer Your License – Most real estate agents who incorporate a real estate business update their W-9 Form with their new entity name and bank account. In addition, many also choose to move their personal real estate license to their new LLC or Corp.

    Below are some other quick tips for starting your real estate business:

      • Choose the right brokerage – Between split commissions and promoting you as an agent, the right broker can make or break you. Because of this, you should research each broker and find out how they support you. Do they send you new leads and do your marketing? In addition, will they take a high commission? These are vital questions to ask.
      • Build your network – Learn to build relationships within the community. Whether you are a real estate agent that needs clients or a property owner that needs renters, create new connections with people in your area. You can also join a larger network to get expert advice, like the American Real Estate Society or the National Association of Realtors.

     
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