Are you passionate about helping others find their dream homes and meet their real estate needs? If so, real estate can be a rewarding career path for you. The industry is also lucrative, providing a promising investment opportunity for entrepreneurs.
In real estate, you can build a thriving career and gain significant financial returns. Considering this, it’s unsurprising that the number of individuals acquiring real estate licenses has increased to 60 percent from 2020 to 2021.
However, most real estate agents operate as self-employed, independent contractors. Around 87 percent of the 1.5 million National Association of Realtors (NAR) members are independent contractors. Being an independent real estate agent means you have complete control over your business functions.
While that gives you increased autonomy and higher income potential than employed individuals, you also have specific legal responsibilities. Setting up an LLC for your real estate practice is an excellent initial step to attaining peace of mind.
This article discusses what an LLC structure is and its implications for your career and venture in real estate.
What is an LLC structure for real estate?
Generally, the government and courts consider a real estate agent an independent contractor if you work as a broker with a firm and file a 1099 form for your tax return at the end of the year.
That indicates you’re operating your real estate business as a sole proprietorship. Being a sole proprietor means you’re not someone’s employee, haven’t entered into a partnership, or have not incorporated your business.
A sole proprietorship is the most straightforward form of business structure. However, it may not be the best choice in the long run, especially when business operations involve taxes and cash flow inconsistencies. As the sole owner, you’re the only party liable for any legal issues filed by dissatisfied real estate clients.
That’s why many self-employed or independent real estate agents use an LLC structure to conduct business in their real estate practice. A limited liability company (LLC) is a type of legal business structure for private companies in the US. It retains the characteristics of both partnerships and corporations.
State statutes permit LLC formation, but the regulations governing them differ by state. Because of its reasonable property taxes, California is often called the real estate investor’s paradise. However, like most real estate professionals and entrepreneurs, you should ask yourself this question: can I be the Registered Agent for my California LLC?
Indeed, you can be your own registered agent in California, provided that you meet the state requirements. The first step is listing your name and address in the public address record. Many entrepreneurs find this step a hassle, so they hire a California Registered Agent instead.
The Implications of LLC on Your Real Estate Career Path
Despite the benefits of a real estate LLC, that doesn’t mean it’s the ideal business structure for everyone. Below, we’ll explain what an LLC structure means for your real estate career.
Personal liability protection
Combining business finances with personal finances is a common mistake among real estate professionals when starting. However, doing so can leave your personal assets exposed to potential legal action, debts, or financial setbacks.
Every personal asset you own can be liquidated in a lawsuit if you operate as a sole proprietor. One of the primary advantages of a real estate LLC is that it protects you from personal liability. A real estate LLC is considered a separate legal entity from the owner.
So, when you structure as an LLC, you won’t be personally liable for debt or lawsuits from the business. Instead, the liability will fall on the LLC. This is crucial since today’s real estate clients will likely file lawsuits, even for minor grievances.
Significant advantages in taxes
Getting your expenses in order can be challenging as a real estate agent. As a result, you may miss tax advantages and incur higher income tax rates.
Remember that you’re subject to the self-employment tax if you operate as an independent contractor or sole proprietor. Another benefit of forming a real estate LLC is that you can take the S corporation election with the Internal Revenue Service (IRS), allowing you to save money on self-employment taxes.
Since the LLC is exempt from income taxes, you can retain any real estate commissions as a company asset when necessary. Such exemptions in self-employment taxes aren’t available to sole proprietors or partnerships.
Streamlined business formation
Real estate LLCs are recognized as one of the most business-friendly legal structures. They encounter fewer state-imposed compliance requirements and ongoing formal procedures than partnerships and sole proprietorships. You can easily form a real estate LLC with the following general rules:
- Selecting a unique business name, which includes the designator LLC at the end
- Choosing a registered agent to oversee the legal documentation for the LLC
- Creating and filing the Articles of Organization, which outline the specific aspects of your LLC
- Drafting an operating agreement to define your real estate LLC’s rules and regulations
- Acquiring the necessary permits and licenses from the state or federal government
While relatively easy to form and register, it’s essential to familiarize yourself with the state’s specific rules concerning real estate LLC formation
Streamlined business formation
Real estate LLCs are recognized as one of the most business-friendly legal structures. They encounter fewer state-imposed compliance requirements and ongoing formal procedures than partnerships and sole proprietorships. You can easily form a real estate LLC with the following general rules:
- Selecting a unique business name, which includes the designator LLC at the end
- Choosing a registered agent to oversee the legal documentation for the LLC
- Creating and filing the Articles of Organization, which outline the specific aspects of your LLC
- Drafting an operating agreement to define your real estate LLC’s rules and regulations
- Acquiring the necessary permits and licenses from the state or federal government
While relatively easy to form and register, it’s essential to familiarize yourself with the state’s specific rules concerning real estate LLC formation
Boosting professional credibility
An LLC structure can boost your credibility as a real estate professional. For instance, when discussing potential investment properties with clients, you will speak on behalf of a legal entity instead of your name. It can help demonstrate that you’re a responsible, legitimate real estate agent or entrepreneur.
Legally Protect Yourself With a Real Estate LLC
Numerous reasons will compel buyers and sellers to take legal action against a real estate agent or broker. Setting up a real estate LLC is a proactive approach to protecting yourself from potential legal problems and liabilities.
Even before generating sales income, consider establishing a legal structure as an essential piece of starting your real estate practice. It’s also wise to seek guidance from an attorney on the most effective approach to protecting yourself, whether as a licensed real estate agent or investor.
