One of the things I frequently hear realtors ask me about is should they set up a Limited Liability Company (LLC) for their Realtor business.
There is a lot of misinformation out there from well meaning people that has led to lots of confusions regarding the correct business entity to chose for your realtor business.
A common question that I hear is should I set up a LLC for my Realtor business.
My response usually is it depends…
What do you want to accomplish with your Realtor Business?
Where do you want you Realtor Business to be in five years?
Where do you want your Realtor Business to be in ten years?
Let’s face it people get in to Real Estate sales for all sorts of reasons.
1. They are looking to make a little extra income by working on the side. They may close 2 – 5 transactions in a year. Any commission income they make comes from their existing personal network. They have a regular 9-5 job (Really 9-5, Do those jobs really exist?). They have a side business and that is all it will ever be.
2. There is the Realtor that will sell 10 – 13 homes a year. I would call these the part-time realtors. They are happy with the income they make from their part-time work and have no intentions of growing their real estate business beyond a part-time income.
3. There is the Realtor that is a part of an established team. They love being a part of the team. They are either a buyer’s agent or a seller’s agent. The may close 25 – 45 homes a year. They get the benefit of being a part of a team that provides all the support they need to handle the transactions they close. They just need to sell homes. This can be a great place to be. They make a good six figure income. This is someone who I would call the Self-Employed Realtor.
4. There is the Realtor that is building a team. This is the time when things get stretched to the limit. You’ve got to establish a back office to manage all the details of a real estate team. You have a closing coordinator. You have someone handling marketing. You have a big hot mess. You need to start getting the right people in the right seats and you need to start creating systems to simply work and establish a standard of quality to properly serve your clients. GCI at this point ranges from $500,000 to $1,000,000.
5. You are a Mega Agent. At this point you are generating north of $1,000,000 in GCI each year. You have some good team members. A large portion of your role is coaching your team and establishing systems to ensure quality.
If you are in category 1 or 2 above, setting up a Realtor LLC my have limited value for your company.
You make be able to get some tax savings, but there could be additional costs related to the LLC that make it an unwise financial move.
If you are in categories 3, 4 or 5, it makes sense to look into a Realtor LLC.
Even if you are not yet in category 3, it may make sense to set up a Realtor LLC if you plan on being in category 3 in the next twelve months.
The remainder of this post is designed specifically for Relators that are in categories 3, 4 and 5. First of all let’s get to the nitty gritty of what a Limited Liability Company is.
A LLC is a business entity.
Every state has different rules and regulations regarding the LLC, so it is important to consult an attorney or tax professional that has knowledge about the state or state that you operate you Realtor business in.
I’m most familiar with North Carolina as I live in North Carolina and a lot of my Realtor clients are NC Realtors.
Why should one set up a Relator LLC?
There are a couple of reasons that I can think of such as the following:
- Limited Liability – This give you personal asset protection from the acts of the business. We live in a litigious society and many businesses do not have what it takes to survive the ups and downs of business ownership. We all know plenty of Realtors that start off and then a year later they are no longer selling homes. If your business goes south and you have properly run your business your personal assets can be shielded from creditors of your Realtor LLC.
- Tax Advantages – There are many tax advantages of owning a Realtor LLC. Some of these tax advantages would be available to you even if you don’t have a Realtor LCC. However the most tax advantages are only available to those who have their Realtor LLC set up correctly.
- Segregation of business and personal asserts. I’ve met plenty of people who unknowingly create a mess of their financial records. Everything runs through one bank account. They pay their mortgage or rent through the one bank account. They deposit their commission checks to the one bank account. All of their Realtor expenses run through their one bank account. All of their personal expenses run through their one bank account. Then when it comes time to file their tax returns they turn in a shoebox of receipts to their tax professional (HINT: Don’t be this type of Realtor! Nobody likes to deal with a mess.)
Now that I’ve detailed some of the reasons that one would want to set up a Realtor LLC,
I’m going to discuss some of the intricacies of a Relator LLC.
The Internal Revenue Service (IRS) does not technically recognize a LLC as a business entity.
The IRS only recognizes four types of business entities as follows:
1. Sole Proprietorship
3. C Corporation
4. S Corporation
Notice that LLC is not listed above.
Wow that is confusing. Everyone I know has a LLC.
Where does this LLC come from? The LLC is dictated by state law.
Every state has different rules and regulations regarding the LLC.
There are even a few states that do not have a LLC.
Now that we know IRS doesn’t recognize the LLC.
We also know that some states allow LLCs.
What is one to do to reconcile the seeming conflict that exists between the Federal Government and the State Government that we operate our business in?
The IRS says that if you want to have a LLC you have to choose how the LLC will be treated for Federal Tax Purposes.
This provides a lot of flexibility for the Realtor.
Each of the four businesses established by IRS have pros and cons. By establishing a Relator LLC, you have the ability to choose a Federal Tax entity that provides you with the most benefits for you individual situation.
You could choose to be taxed as a Sole Proprietor, a Partnership, a C Corporation or a S Corporation.
Now that you have a basic understanding of what a Realtor LLC is, it is time to start to consult a competent attorney or accounting professional to guide you the best decision for your Realtor LLC.
Before you meet with the professional, be prepared to do your homework. Develop a one page game plan of what you want to accomplish with your business. Here are some questions to aske yourself:
1. What do I want to accomplish or achieve with my business in the next 12 months?
2. Where do I see my business growing to in five years?
3. What is my exit plan?