Why a Real Estate Agent needs an LLC and How to Set it Up

“You down with I-N-C? No L-L-C! L-L-C, how can I explain it…” For some reason Naughty by Nature was the first thing that popped into my head when I thought about forming an LLC. Maybe it’s because YouTube recently recommended to me (for some wild reason) the O.P.P. themed Bar Mitzvah scene from the movie Malibu’s Most Wanted. Or maybe it is because the main reason to form an LLC is to limit personal and tax liability, which is what many of the 1% does to protect their wealth. And doesn’t that just feel a bit naughty?

Well, if you want to utilize the law and get yourself into that 1%, it won’t! This blog is going to help you understand why a real estate agent should form an LLC and the general steps to setting one up. Even though, and especially since I am an attorney licensed in Kentucky only, I do have to give this legal disclaimer: this blog published by Perry Real Estate College is available for informational purposes only and is not considered legal advice on any subject matter. By viewing blog posts, the reader understands there is no attorney-client relationship between the reader and the blog publisher.

You’re a Small Business Owner

Whether you are a broker working as a sole proprietor or an agent working for a broker company, you are considered a small business owner. As a licensed real estate agent, you are most likely an independent contractor for your broker company. All of this creates certain legal and tax responsibilities that can affect your net income.

The main purposes of setting up an LLC are to maximize your net income while minimizing your personal liability for your real estate work. The LLC will become your employer, while your broker company issues commission checks to your LLC.

Pros & Cons of an LLC

Real estate agents deal with a lot of legal matters, and you never know when an error can lead to a lawsuit. There may be mistakes on documents, breaches of contract, and other issues. When these occur, a plaintiff could come after, not only your business funds and assets, but your personal assets such as your family bank account, your car, and your home. Having an LLC in place can limit any damages to your business assets only.

You tax liability can improve greatly if you form an LLC by saving on employment, self-employment, and payroll taxes. Registering your business as an LLC provides increased tax options.

You can file as a sole proprietor if you are the only owner, you can file as a partnership if your business is owned by two or more members, or you can file as an LLC with an S or C corporation election. You can estimate your S-Corp savings with this tool to see how much you might save. Also, having S-Corp status as an LLC decreases your chances of being audited by the IRS.

The biggest negative of creating an LLC are the licensing fees. States charge a filing fee to form and register an LLC, whereas they require no business formation paperwork for a sole proprietorship. The LLC must also pay the fees associated with having a registered agent and filing annual reports.  However, a couple hundred dollars every year is an easily manageable (and tax deductible) business expense for even the average sales agent.

How to Set up an LLC

First, you should talk with an attorney in your jurisdiction about forming an LLC. There are attorneys in every state that can help prepare the proper documentation and file everything for you. Since an LLC also requires a registered agent, you will have the opportunity to “double dip” with the attorney if they also consenting to be your agent.

The process of setting up the LLC will change your legal relationship with your broker company and possibly the Real Estate Commission. You also want to discuss your intentions with your broker and need to know if your LLC needs its own real estate license. While there is plenty of information on your state’s secretary of state website as well as Google for you to set it up on your own, you should still at the very least discuss it with your broker.

Assuming you are going to file everything on your own, you will next need to pick a business name for your LLC. It must be unique and not already in use. Most states, like Kentucky, have a business name search on their Secretary of State website to help make sure a business name is not already taken.

Once you have a name, you will want to designate your registered agent and register your LLC with appropriate articles of organization with your state. This is typically filed with the Secretary of State through an online portal. You will also want to get your federal EIN number and S-Corp Election status at this time. 

Once you receive your EIN number, you should be able to open a business bank account and update your W-9 with your broker company. It is important to open up a business bank account because it shows the separation of personal and business assets. If you don’t have the separate account, it will allow potential plaintiff’s to “pierce” the corporate veil and get at personal assets. It is important to stay organized and do things by the book when it comes to operating as an LLC.

Now that you know the benefits of an LLC and how to set one up, what are you waiting for? The longer you wait to set one up, the longer it may take you to get into that 1% club! And let’s be honest, everyone wants to be in that 1% club. 

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