By Realty Times
If you’re a real estate agent working as a self-employed professional, or an independent contractor, you should consider setting up an LLC. The same is true if you work for a brokerage, but you work similarly to an independent contractor and file 1099s for your tax returns.
When you’re an independent contractor, you have freedom and flexibility compared to being a salaried employee. There are more responsibilities you have to adhere to, however.
Specifically, in terms of being a real estate agent, if a buyer or seller were to sue you and operate as an independent contractor without a separate corporate structure, you could be personally liable for damages. You could lose all of your assets as a result.
An LLC provides you with the protection you need.
What Is an LLC?
An LLC is a Limited Liability Company. An LLC is one legal entity that someone can form to own and operate a business. LLCs provide the same limited liability as a corporation, but they’re popular because they’re cheap and easy to set up and operate.
Any time you’re going to start, or you already run a business as a sole proprietor, you should think about forming an LLC.
An LLC can be used to run almost any kind of business and one of any size.
If you also own rental or commercial property, an LLC is a very common structure.
General benefits of an LLC, whether you’re a real estate professional or not, include:
• LLCs protect your personal assets. You, as the LLC owner, are typically not responsible for debts incurred by your business or because of business-related lawsuits. Since you aren’t personally liable, creditors or anyone filing a lawsuit against your LLC can’t collect against personal assets. They can only collect from the assets of the LLC.
• There’s a benefit of an LLC which is known as pass-through taxation. If you have profits or losses, they pass through the business to your personal tax return. Your earnings are taxed at your personal tax rates. You might qualify for a pass-through tax deduction, which took effect in 2018 under the Tax Cut and Jobs act.
• It’s simple to set up an LLC and operate a business under this entity. You don’t need to worry about things like officers and directors, which you need if you set up a corporation.
• There’s flexibility in terms of management, taxation, and overall ownership.
• You’ll improve your credibility as a real estate professional when you have an LLC.
One of the big mistakes a lot of new and even more experienced real estate agents make is not separating their business and personal finances. You might, for example, put business expenses on a personal credit card. This can create not only legal liabilities but an overly complicated financial situation, particularly around tax time.
There are a few disadvantages of an LLC. It may cost a little more to set up and operate than a sole proprietorship, but not hugely so.
The only other real downside would be for a business planning to seek outside investors, which isn’t likely the case for you if you’re a real estate agent.
How Do You Start an LLC?
Starting an LLC as a real estate agent or professional should be something you can do pretty easily on your own. You do have to follow whatever the rules are in your state, but generally, you start by choosing a name.
You have to make sure it’s not the name of any other LLC or entity already registered in your state.
You’ll then file articles of organization with your state’s corporate filing office. It may cost a few hundred dollars to start the process.
If you’re a real estate professional and you haven’t already set up protection for your personal finances in the form of an LLC or another entity, it’s a good idea to consider doing so.