You’re already a real estate agent (or you’re very close to becoming one). But now you’re wondering, how do you make it “official”? Should you form an LLC?
Do you need to?
For most real estate agents, forming an LLC is a good choice — and it’ll be easier the earlier you do it. But there’s more that you should know, especially if you don’t want to spend more than you need to on unnecessary services.
What is a real estate LLC?
An LLC is a “limited liability company.” It’s a business structure that can help you protect your personal assets if something goes wrong with your business.
If you’re a sole proprietor (you’re not currently working with anyone), then you might not need an LLC. But if you’re working with anyone else — even just a few independent contractors — then you should have an LLC.
|How protected is “protected”?|
An LLC isn’t a magic shield. If you co-mingle your funds (mix your business and personal accounts), an LLC might not even help you. You still need to follow best practices for your business — such as making sure you maintain a separate business bank account.
Why would a real estate agent need an LLC?
You may have noticed that a lot of agents have an LLC. But since most agents are sole proprietors, do they need one?
There are a few reasons why an LLC can be helpful, even for a sole proprietor:
- Keep your personal and business assets separate. This is important not just for legal purposes but also for tax purposes. Having an LLC can be great from an organizational standpoint. You draw a boundary around what is “work” and what is “life” — and you can manage your finances more effectively.
- Save on taxes. This depends on your situation — and it’s something you should bounce past your tax professional. But an LLC can either help you retain income (by being taxed as a corporation) or as a pass-through entity like a partnership.
- Get funding for your business. If you’re looking for investors or partners, they may be more likely to work with you if you have an LLC. Most “business funding” companies (like small business loans and credit lines) will require that you have some form of business structure.
- Establish peace-of-mind. If something goes wrong with your business, you know there’s at least some legal wall between your business and you. For instance, if you get sued by a client.
Fundamentally, the reason to get an LLC is that there are few compelling reasons not to. An LLC won’t hurt you, and it’s pretty easy to get. Still, it’s not foolproof protection. Consider getting “errors and omissions” or “professional liability” insurance, too.
How to form a real estate agent LLC
Countless services will help you form an LLC. They range in cost from $50 to $300. You don’t need to use these services, but they can make things easier.
Otherwise, here are the steps you need to take to create an LLC.
- Choose a name for your LLC. This should be the name of your business. It can be your personal name, but it doesn’t have to be. A lot of real estate agents and real estate investors have a fairly generic LLC name but do business under a more marketable persona.
- File the Articles of Organization with your state’s Secretary of State office — here’s an example of the Texas SoS platform. You can usually do this online, and it shouldn’t cost more than a few hundred dollars. Strictly speaking, the filing is usually under a hundred dollars, but you may pay a couple hundred to a service that creates small business documents.
- Create an Operating Agreement for your LLC. This is a document that outlines how your LLC will be governed and how it will operate. You don’t need to file this with the state, but it’s a good idea to have one for liability protection and to create a structure for your business entity. At the same time, consider creating a financial and business plan.
- Get an Employer Identification Number (EIN) from the IRS. This is basically a social security number for your business. You’ll need this to open a business bank account and file taxes. Don’t pay a service to do this. While paying a service to create your Articles of Organization or your Operating Agreement might make sense, an EIN just requires a single fast, simple form.
- Open a business bank account. This will help you keep your personal and business finances separate. At the same time, consider establishing a business credit card or a business line of credit to start building your business credit — which is separate from your personal credit.
- Comply with any additional requirements in your state. Some states have additional requirements for LLCs, such as getting a business license. Check with your local City Hall to find out the requirements for operating a business in your area.
- Start tracking your business expenses. Now, you should start separating your business and personal expenses and income. You can get help by signing up for an accounting system like QuickBooks or Freshbooks.
- Schedule your tax returns and annual filings. Note that as an LLC, you need to file your tax returns and your annual registration on time. Put it on your calendar. If you don’t file your taxes on time (even if you’ve made no money!), you could get fined or otherwise penalized.
Don’t want to do it all on your own? Services like LegalZoom make it easy to create the documents you need. Keep in mind — different states will have different forms, processes, and regulations. You can’t always trust the advice you find online; you need to pull local data. When in doubt, talk to the Business Development department of your city.
|What is personal liability?|
Every business owner needs to separate their personal and business transactions. An LLC offers limited liability protection — but you could still bear personal liability if you mix your funds. For instance, you could overcharge someone and then use that money to pay your mortgage — at that point, your personal funds become involved in a business transaction.
Things to consider before forming an LLC
What other things do you need to know before creating your real estate LLC? As a process, it shouldn’t take longer than a few hours — although there may be some waiting time as the Secretary of State processes your documents.
- Do you want to get help? You can get a lawyer to prepare and review your documents — and a tax attorney to tell you whether being taxed as a corporation or a partnership makes more sense for you.
- Are you involving anyone else? Married couples, for instance, frequently form LLCs together — but this isn’t strictly necessary because married couples are generally treated as a single entity.
- What are you going to name your business? As noted, you should name your business early on. But note that you could name your business something like “Jane Doe LLC” and still do business as (“DBA”) “Boutique Real Estate Connections.” This is a trade name and can also be filed with the Secretary of State.
- How do you want to be taxed? One of the major tax benefits for an LLC owner is the ability to choose how to get taxed — and properly separate your tax deductions. You must file your S corporation election when you file your tax return.
- Are you ready to start your LLC? If you aren’t going to do business for another year, you probably don’t need to start an LLC yet. Consider when you will actually start investing in equipment and making sales.
Forming an LLC is the perfect first step toward creating a “real” real estate business. That being said, don’t rush into it. Take the time to get your documents in order and to talk to your own financial consultants.
|What is an S corporation?|
You may have heard about LLCs and S corporations in the same context. An LLC is a type of legal formation; an S corporation is a form of taxation. They are generally used interchangeably. Similarly, someone who is a sole proprietorship can create a single-member LLC which will be handled similarly. A C corporation, on the other hand, is a different type of taxation altogether.
Conclusion: Should You Form a Real Estate Agent LLC?
Absolutely. The question is less “if” and more “when and how.” An LLC provides you with some protection from legal action, debt collection, and other incidental problems — but it’s not flawless. Before you start, you should thoroughly understand the legal ramifications of an LLC (and the tax responsibilities).
An LLC creates a wall between your finances and your business finances, reducing your risk for your business liabilities. But it will cost a few hundred dollars to establish. You’ll need to file documentation with the state and keep your registration updated — so it does require upkeep.
While you don’t need an EIN for your real estate LLC, you should still get one. An EIN (“employer identification number”) will let you open business bank accounts, hire contractors and employees, and get business-related discounts (such as tax-free purchasing).
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