As an independent real estate agent or real estate investor, there's no doubt you have a lot on your plate. Thinking about your business structure may be the last thing on your mind, but it's actually important to consider. The good news is that once you set up your structure, you can rest easy knowing your business and assets are organized appropriately.
Why Consider a Corporation or LLC for Your Real Estate Business?
Many independent real estate agents think that they are already "organized" in a business sense by belonging to a brokerage. Unfortunately, that's not the case. Your brokerage gives you a 1099 at the end of each year, not a W-2, so you are considered an independent contractor. This means that in the eyes of the government and courts, you are the sole owner of your own real estate business.
This really comes into play if there are ever any legal actions taken against you. A buyer might sue you, claiming you misrepresented them in the purchase action of a property. Or, a seller might claim damages saying that your marketing methods or failures caused a loss of money on the sale. If these things happen, and your state real estate commission allows you to sign contracts in your entity name vs. your broker's name, then you alone are responsible. In an un-incorporated business structure such as a sole proprietor, your personal finances, retirement accounts, and even your home could be on the line to pay off damages.
This is why many independent real estate agents consider incorporating or forming an LLC for their real estate practice. There are many benefits that can be gained, and one of the most important is that your personal property is not considered accessible for business claims or losses.
LLCs for Real Estate Investing
Some real estate investors purchase property they intend to use as a vacation home in the off season, but rent to vacationers during peak times. These investors run a serious liability risk if they have not considered formation of a real estate LLC. By properly forming an LLC for real estate investments and making sure it's appropriately maintained, you can significantly reduce your exposure to financial risk.
While real estate investors can choose to incorporate, the flexibility of an LLC real estate holding company makes it the recommended formation for investors. An LLC doesn't require some of the formalities and record keeping of a corporation, and also allows you to choose whether or it's most advantageous to file taxes as an s corp or as a part of the owner's usual return.
Benefits of a Real Estate LLC or Incorporation
The benefits of choosing to incorporate your real estate business or form a real estate LLC structure extend beyond personal financial protection. Here are some other important benefits of choosing an LLC or corporation for your real estate practice.
- Tax Savings. One advantage of forming a real estate LLC is tax savings. As an LLC or s corporation, you can choose S-Election on your tax form. This will give you important exemptions in self-employment tax that are not available to sole proprietors or partnerships. In fact, many independent real estate agents and investors find real estate LLC tax advantages to be one of the most valuable aspects of incorporating.
- Less Risk of an IRS Audit. Some independent real estate agents incorporate their real estate business in order to help avoid an audit. In an article from January 2011, the Wall Street Journal found that owners of incorporated businesses who file taxes with an S-Election under an LLC or Corporation structure vs. a sole proprietor filing a Schedule C are ten times less likely to be audited by the IRS.
- Positioning for Success. You've heard of "dressing for success," but what you may not know is that choosing to form a real estate LLC or corporation can position you for success. Many agents find themselves more active and self-reliant after they incorporate because they take their business more seriously, and become more organized by keeping their personal and business affairs separate. In addition, when you let your customers know you are incorporated yourself, you gain an added layer of credibility, which could potentially lead to more listings and sales.
- Additional Credibility and Brand Protection. Your profession has many designations that carry prestige: GRI, CRS, etc. and when you have LLC or Inc. after your name, you will gain instant credibility with clients and this could potentially lead to more listings and sales. In addition, once you incorporate with your name in your state, nobody else can use that business name to incorporate.
Other Items to Consider
There are a few common steps that many independent real estate agents take after they incorporate or form an LLC:
- Obtain an Employer Identification Number (EIN) from the IRS. Click here for more information about obtaining your EIN.
- As a way to maximize tax flexibility and savings, most independent real estate agents who incorporate themselves fill out IRS Form 2553 with an S-Election and send it in to the IRS.
- Once you have your Articles of Incorporation / Organization and EIN number, most independent real estate agents who incorporate themselves open a separate Business Bank Account to keep their personal finances separate from their business finances. Many banks have promotions that provide incentives to open up new accounts; so it pays to shop around.
- Most independent real estate agents who incorporate themselves update their W-9 Form with their broker indicating their new entity name and bank account. Some brokers require additional forms to change your status. Ask your broker what you need to do to make this transition.
- If your state allows you, most independent real estate agents transfer their personal real estate license into their new LLC or Corporation. It is important to check with the regulatory board or commission that awarded you your real estate license about any restrictions, qualifications, and fees.
- Additional Filings and Fees: The Secretary of State Division of Corporations of every state charges a fee to incorporate or form an LLC. They can range from $40 to $550. Most state fees for setting up a legal entity are below $200. Contact us for state specific pricing.
Once you incorporate, your state may also have what is called an "annual report," or a "franchise tax" filing requirement. This is a form you submit to the state annually or bi-annually stating that your entity is still in business, and confirm who owns the entity. Some states have a fee for this filing. Contact us for state specific pricing.
Some state Real Estate Commissions or Boards may also have fees required to change your license from an individual person to a legal entity. It is important to check with your state incorporating requirements, and the regulatory board or commission that awarded you your real estate license about any restrictions, qualifications, and fees.
Choosing the best entity for your independent real estate business is dependent on several factors. LLC's have become very popular because they have a more flexible ownership structure with fewer corporate formalities and filings than corporations, and owner members of LLC's can be non-citizens of the USA. Owners of LLC's or corporations may have similar tax treatment if an S-Election form 2553 is filed with the IRS. Most states have different filing fees to create an LLC vs. a corporation. In some states it is more expensive to form an LLC vs. a corporation. Our Customer Service Agents can assist you with comparing pricing in your state. In addition, some state real estate boards or commissions may only allow certain types of corporate structures for your particular type of agent or broker license. It is important to check with the regulatory board or commission that awarded you your real estate license about any restrictions, qualifications, and fees.
Before transferring the deed of a property into an LLC, the LLC must be formed. incorporate.com can help properly form and maintain an LLC. To transfer a deed to an LLC, the deed will need to be prepared in the LLC's name and filed and recorded in the appropriate office(s) located in the jurisdiction in which the property is located (usually the county's recorder of deeds office). The deed must be signed by the person or entities transferring the property, and will require the proper notarizations.
There are different types of deeds that may be used to transfer the title to the property. For example, some deeds may contain warranties purporting to protect the grantee-purchaser from possible defects in the title of the property. The type of deed used to transfer the property to an LLC generally will depend on the particular property at issue and the individuals or entities involved.
Also, a property owner's ability to transfer the deed to an LLC may depend on whether the property is subject to a mortgage. Unless the underlying loan is paid in full prior to or at the time of the transfer, the deed will only transfer subject to the mortgage. Moreover, the loan and/or mortgage documents may prohibit a transfer of the property unless the loan is paid in full or the lender consents. Whether or not the lender holding the mortgage permits the deed and the mortgage to transfer to the LLC, will depend on the circumstances. For example, the lender may allow the LLC to assume the loan and mortgage, either with or without changes to their terms. Alternatively, the lender may require that the LLC obtain a new loan in the name of the LLC, and that the existing personal loan be repaid with the proceeds of that new loan. In either case, because the loan is being made to an entity and not to a private individual, the lender may request personal guarantees from the members of the LLC or additional collateral. The exact terms, conditions and loan options will vary depending on the lender and other circumstances.
We recommend that property owners consult with a lawyer with regard to any transfer of property to ensure that it is done properly.
- An LLC must be formed before a deed can be transferred to it. incorporate.com can help properly form and maintain an LLC.
- A deed must be prepared in the LLC's name, signed by the grantee, notarized, and recorded in the appropriate office(s) (usually the recorder of deeds office where the property is located).
- There are many types of deeds, which may differ based on the types of warranties provided.
- The ability and steps necessary to transfer a deed to an LLC may depend on whether the property is subject to a mortgage.
- We recommend that property owners consult a lawyer to ensure that the transfer is done properly.
Many of our customers incorporate or form their LLC in the state where their company intends to conduct the majority of its business. However, in deciding where to form a company, there are many factors to consider, such as the cost of formation, tax laws, and general laws governing the actions and liabilities of the LLC or corporation within each state.
Many small and large business owners choose to incorporate in Delaware. Delaware has no minimum capital requirement, no sales tax, no personal property tax, a relatively low franchise tax, and advanced and flexible laws governing corporations and LLCs. Also, Delaware is one of the few states that permit series LLCs, which may be an attractive option for investors with multiple properties.
One factor that our customers consider when forming a company in a given state is that the company may also have to qualify to do business in other states where it owns properties or otherwise conducts business. The LLC or corporation is often referred to as a "foreign" LLC or corporation in states other than the state in which it was formed. Generally, qualifying a company to do business in a state other than its state of formation is similar to the formation process, and the LLC or corporation may be required to pay filing fees and provide certain information and documentation to the state.
The costs of forming and qualifying a company to do business may be an important factor to consider in determining where to form the company. For example, if investors are considering forming a company in Delaware but all of the properties to be owned and operated by the company are located in New York, then the investors may elect to form the company in New York (and not Delaware), and avoid the dual costs associated with forming the entity in Delaware and then qualifying that entity to do business in New York. However, the costs associated with forming and qualifying a company are only one or many factors to consider when forming and qualifying a company. Also, if a company is required to qualify to do business in a state but fails to do so, it may be subject to penalties. incorporate.com can help investors form and qualify an LLC or corporation in any state and in a cost effective manner.
- In deciding where to form a company, there are many factors to take into account such as the cost of formation, tax laws, and the general laws governing the operations of the LLC or corporation within each state.
- Many business owners decide to incorporate in Delaware for a number of reasons, such as certain economic advantages and Delaware's advanced corporation and LLC laws.
- If a company does business in a state other that the state in which it was formed, it will likely have to "qualify" to do business in that state.
- incorporate.com provides formation and qualification services in all states and in a cost effective manner.
If an individual investor owns real estate in their own name and has a personal loan and mortgage relating to that property, they will need to negotiate with their lender to attempt to transfer the loan and mortgage to the LLC. Whether the lender will agree to allow the LLC to replace the individual investor as the borrower on the loan and mortgage will depend on the particular circumstances presented. Moreover, in connection with agreeing to transfer the loan and mortgage to the LLC, the lender may require changes to the terms of the loan and/or additional collateral or personal guaranties.
Rather than attempt to transfer an existing loan, the LLC may seek to obtain a new loan and mortgage, such that the proceeds of the new loan would be used to pay-off the individual investors' outstanding personal loan in connection with the transfer of the property to the LLC.
Typically, lenders, such as a mortgage company will grant loans only if they are satisfied that the borrower has the ability and resources to repay the loan.
Keep in mind that the real estate purchased by the LLC or corporation typically must be pledged as collateral for the loan. [See FAQ #2].
Of course, in order for the LLC to obtain a loan and mortgage with regard to the property, it will be necessary to transfer the property to the LLC.
Before transferring the deed of a property into an LLC, the LLC must be formed. incorporate.com can help properly form and maintain an LLC. To transfer a deed to an LLC, the deed will need to prepared in the LLC's name and filed and recorded in the appropriate office(s) located in the jurisdiction in which the property is located (usually the county's recorder of deeds office). The deed must be signed by the person or entities transferring the property, and will require the proper notarizations.
There may be costs and tax issues relating to such a real estate transfer and changes to existing loans and mortgages, which can vary significantly based on the terms of the transaction and other circumstances. Given the many important issues presented in such a transaction, it is often prudent to obtain advice from a real estate attorney.
- In order for an individual investor to transfer a loan or mortgage to an LLC, the investor will need to negotiate with their lender.
- Alternatively, the LLC may seek to obtain a new loan or mortgage, which can be used to pay-off the individual investor's existing loan.
- In order for the LLC to obtain a loan with regard to a property, it will be necessary to transfer the property to the LLC.
- There may be costs and tax issues relating to the transfer of the property and making changes to the existing loans and mortgages. Given the many important issues relating to such a transaction, it is often prudent to obtain the advice of a real estate attorney.
Many of our customers form an LLC to hold and manage their real estate in order to protect their personal assets from a claim or lawsuit relating to their real estate investment. If an investor owns multiple properties, he or she may be able to further protect his or her assets by forming a separate LLC to own and hold each separate property. If the separate LLCs are properly formed and maintained, then theoretically only the assets owned by a specific LLC would be subject to claims or lawsuits against that LLC. However, there are costs and administrative responsibilities associated with forming, qualifying (if necessary), and properly maintaining multiple LLCs, which should be considered in deciding whether to form separate LLCs for each property.
Another option to consider, if permitted under applicable law, is a series LLC, which is an umbrella entity consisting of one LLC with multiple "series" or "cells." Series LLCs may be of interest to individuals who have several large assets (such as multiple properties) for which they desire to maintain separate liability protection.
- Many of our customers form an LLC to hold and manage their real estate in order to protect their personal assets.
- One option to provide additional protection may be to properly form and maintain a separate LLC to hold each property. However there are costs and administrative burdens associated with properly forming, qualifying and maintaining each separate LLC.
- Another option may be to form a series LLC if permitted under applicable laws.
A series LLC is an umbrella entity consisting of one LLC with multiple "series" or "cells." Series LLCs are generally of interest to individuals who have several large assets (such as multiple properties) for which they desire to maintain separate liability protection.
To best understand how an LLC and a series LLC differ, a typical non-series LLC (if properly formed and maintained) will generally protect its owner's personal assets from the LLC's business obligations. However, it will not protect one asset owned by the LLC from being used to satisfy a judgment relating to another LLC asset. Under a non-series LLC, all assets owned by the LLC are potentially subject to any claim or lawsuit against the LLC. For example, assume that a typical non-series LLC holds several properties. If a person is injured at one of the LLC's properties and sues and wins, then all of that LLC's assets – even the other properties that it owns – can be used to satisfy the judgment obtained against the non-series LLC. The LLC could potentially lose all of its properties based on a lawsuit or claim that is related to only one of its properties.
A properly formed and maintained series LLC will treat each created series as a separate entity, with its own rights and obligations. Theoretically, under a series LLC, if someone is injured at Property #1 (which is an asset of Series #1) and sues the LLC and wins, then only the assets of Series #1 should be at risk with regard to the claim.
The series LLC originated in Delaware, but the laws of some other states (such as Illinois and Oklahoma) also provide for the formation of a series LLC. The complete list of states that recognize a series LLC includes:
- Series LLCs are generally of interest to individuals who have several large assets (such as multiple properties) for which they desire to maintain separate liability protection.
- A typical non-series LLC will generally protect its owner's assets, but it will not protect one asset from being used to satisfy a judgment relating to another LLC asset. A properly formed and maintained series LLC on the other hand will treat each created series as a separate entity, with its own rights and obligations, and may provide additional asset protection.
- The series LLC originated in Delaware, but the laws of some other states (such as Illinois and Oklahoma) also provide for the formation of a series LLC.
Most states allow you to incorporate or form an LLC. However, it is important to contact the state agency that awarded you your real estate license to confirm if your state allows you to form a business entity.
Most brokerages allow an independent real estate agent to form a corporation or LLC. However, some brands are more restrictive than others, so it is important to check with your brokerage about any restrictions, qualifications, and fees.
Some states allow you to have a co-owner / member under your new legal entity; and some require them to be a licensed real estate agent in order to have real estate commissions paid into the new entity. However, there are other states that expressly prohibit having more than one owner. It is important to check with your state regulatory board or commission that awarded you your real estate license about any restrictions, qualifications, and fees.
Though in most states you can register any name you would like, some states require that if you are receiving real estate commissions into an incorporated entity, you can only use your name as it appears on your license followed by the entity designation (example: John Doe, LLC, or John Doe, Inc.). It is important to check with your state regulatory board or commission that awarded you your real estate license about any restrictions, qualifications, and fees.
As a real estate agent considering an LLC or an investor reviewing LLC real estate company options, you may find that you need additional help. incorporate.com recognizes your need and offers many products and services to help you secure your assets and protect yourself financially. From creating LLC documents to helping you maintain your structure, we allow you to save time and focus on what you really love – real estate!
For a full list of products and services offered by incorporate.com, check out Our Services. We'd like to point out the following services in particular to real estate agents and investors that are considering forming an LLC or corporation.
- Incorporate or Form an LLC
- Business Licenses & Permits
- Employer Identification Number (EIN)
- Doing Business As (DBA) Names
- Corporate & LLC Compliance Kits
- Bylaws & Operating Agreements
Associations and Organizations
- American Real Estate and Urban Economics Association
- American Real Estate Society
- Mortgage Bankers Association of America
- National Real Estate Investor's Association
- National Association of Realtors