Should I Set Up an LLC as a Real Estate Agent | 7 Reasons Explained
Should I set up an LLC as a real estate agent? We have made this post to aid everyone who usually asks this question. As a real estate agent, one of the first considerations you’ll have to make is how to organize your new business.
A company structure determines how you operate, the tax rules you must follow, and the level of legal protection you have in a crisis. As a result, you must pick the correct structure for your company. It’s crucial to secure your assets with the proper business structure when you establish your real estate investment firm as a real estate agent.
Because of the nature of your company, you must get protected against the ramifications of a lawsuit. As a result, this article delves further into why real estate brokers should form an LLC.
What is a limited liability company (LLC)?
A Limited Liability Firm (LLC) is a corporate entity that protects its owners’ assets if the company is issued. An LLC provides tax benefits compared to a sole proprietorship or a more sophisticated company.
Small company owners who seek to restrict their responsibility generally employ LLCs as a corporate structure. Realtors and real estate agents get included in this category.
Is it true that a real estate agent is a small business owner?
Small business entrepreneurs are real estate brokers who also invest in real estate. Real estate agents are classed as self-employed and deemed small business owners by the IRS if they:
Isn’t an employee of anybody, haven’t created a partnership with anyone, and haven’t incorporated their company
In the view of the IRS, if you work for yourself and submit a 1099, you are a self-employed independent contractor.
How real estate agents operate like real estate companies
Entrepreneurship is required to be a profitable real estate agent. To put it in another dimension, you are what you kill. You don’t have the luxury (or maybe boredom) of coming to the same spot every day to do the same work for a certain amount of time and receiving payment every two weeks.
You plan your days and pick where you need to travel to produce more leads and cash. To succeed, you must develop a business strategy and then stick to it! What is a non-business owner required to create a business plan?
Real estate agents are considered separate legal entities. Business owners are responsible for calculating and filing payroll taxes on behalf of their workers.
This is not the situation for you, though. You are a self-employed individual responsible for computing your payroll taxes. You are considered a distinct money-making enterprise from your company in the eyes of the government.
As an independent consultant, you will be regarded similarly to someone who owns their own company. You’re a self-employed entrepreneur.
Should I set up an LLC as a real estate agent?
Yes. An LLC is the proper corporate structure for real estate agents who own an investment company.
In comparison to other company forms, an LLC structure for real estate agents offers various advantages to real estate agent investors. Among them are the following:
It protects financial instruments
One of the significant advantages of forming your company as an LLC is the protection of your assets. Your brokerage coverage may not cover the losses if you get sued.
If you run a business as a sole proprietor, any help you hold might get liquidated in the event of a lawsuit.
On the other hand, your assets get secured when you form an LLC. You would dissolve the LLC and start a new business. This is why creating a limited liability company (LLC) is so vital for real estate investors.
It saves money in taxes
The self-employment tax for contract workers applies to you as an independent contractor. The good news is that you may opt to have your LLC taxed as a different sort of company if you create an LLC and engage with a qualified legal real estate firm.
An LLC is a legal rather than a tax status. As a result, you may get taxed as an S Corporation. S Corporations are exempt from the self-employment tax, which funds Medicare and social security and gets paid by independent contractors, which is beneficial to you.
Retirement accounts with self-direction
When you set up your business as an LLC, you may utilize it to launch a Solo 401(k) plan (k). You may acquire tax-free assets, become a hard money lender, and earn a high-interest rate on the funds you lend using this account. If necessary, you may even lend money to your LLC.
Professionalism
An LLC serves as the public face of your company. Engaging with a company entity rather than your name when speaking with customers about potential investment properties goes long. This gives individuals you deal with in the real estate investing sector a feeling of professionalism and trust.
Keeping your finances separate
When real estate agents start, they often mistake combining their company and personal funds, such as putting business costs on their credit cards. You may prevent this by forming a limited liability company (LLC) with a business bank account, which reduces your risk of personal responsibility from commingled cash.
Raising professional credibility
Because selling or purchasing a property is such a significant investment, prospective customers will most likely prefer to engage with someone they see as knowledgeable.
This impression may get created by using an LLC. Having a company name on a contract or business card might demonstrate that you are a responsible, respectable businessperson, leading to more business.
For all of these factors, forming an LLC may be beneficial to your real estate business, and failing to do so would be a mistake in most circumstances.
Other Considerations Following the formation of a limited liability company (LLC)
After forming an LLC for your real estate activities, you may take specific further steps to get additional advantages. These are some of them:
- Obtaining a Worker Identification Number (EIN).
- Obtaining an S Corporation election from the IRS for your LLC. This will allow you to optimize your tax flexibility. To do so, fill out IRS Form 2553.
- Get a bank account for your company. This can help you keep your personal and company funds separate and boost your credit score.
- Keep your W-9 Form up to date with your broker. Indicate the name of your new bank account and organization.
- You may transfer your real estate license to your LLC if your state allows it.
- Inquiring about fees, qualifications, or limitations relevant to your LLC with the regulatory commission or board that issued your real estate license.
- Be mindful of any extra costs or files that may be required. Incorporation fees might range from $40 to $550. A yearly report with a filing fee may be required.
When and Where Should You Form a Limited Liability Company (LLC)?
It is preferable to officially organize an LLC for your real estate investment firm before purchasing your first piece of property to receive all of the protections and tax advantages that come with it. Once the company gets formally created, the benefits of restricted liability begin to accrue.
It is feasible to organize the LLC and transfer the property to the firm if you already own it. However, this is a more complex scenario, and you should get legal advice if you find yourself in this position.
You’ll also need to pick where your LLC will form, especially if you want to invest in real estate in several states. Although it is typical to create an LLC in the state where you reside or where your company is situated, there are certain advantages to doing so in another state.
Lower taxes, fewer corporate formalities, and more accessible filing procedures are all hallmarks of Delaware, Nevada, and Wyoming. However, registering your LLC in a state other than your own complicates the procedure. Thus, you should contact a lawyer in the state where you intend to file.
Frequently Asked Questions
Should I set up an LLC as a real estate agent?
Yes. An LLC is the proper corporate structure for real estate agents who own an investment company.
What is a limited-liability corporation (LLC)?
A limited liability corporation (LLC) is a standard corporate form for real estate firms engaged in purchasing, selling, or renting commercial or residential property.
Because of the multiple dangers associated with owning a real estate business, most real estate business owners want to take the necessary precautions to minimize their responsibility.
These dangers include property depreciation, litigation originating from construction mishaps, and problems with renters. Creating a different company for your business, such as an LLC, is one strategy to lessen the risk of personal responsibility.
Is it possible for an LLC to possess real estate?
Yes. A limited liability company (LLC) is a separate legal entity with its holdings and revenue. As a result, it may buy real estate, such as a home or a company.
Should I form an LLC for my second home?
Yes. Accidents can happen, and a second home should be about leisure and pleasure. In general, LLCs provide more security to their shareholders by limiting responsibility inside the LLC rather than blaming private owners.
Conclusion
In conclusion, an LLC provides various merits. And if you need more help here, the above highlight on “should I set up an LLC as a real estate agent” will aid you greatly.
