Forming a Real Estate LLC – Pros & Cons Deep Dive (2022 Updated)

Chris Heller HeadshotChris Heller, Licensed AgentDecember 1, 2022

Business,,Technology,,Internet,And,Networking,Concept.,Young,Businessman,Working,OnWhen you start your real estate career, you will likely be working for a company that is already registered as an LLC (Licensed Liability Company) or another type of entity. But when you step out on your own, you may decide you want to protect your personal assets while increasing your tax options and credibility. Creating a real estate LLC can help you achieve these goals.

This article will provide information on LLCs for real estate agents so you can decide if it’s a step you want to take.

What is a real estate LLC?

An LLC is a business structure that protects a business owner’s assets. If the owner is sued or owes money, the plaintiff or collector can only come after the business’s assets, not the owner’s personal assets.

It also increases tax options for real estate agents.

michael cocke headshotMichel Cocke
CEO at 253 Houses
Licensed Real Estate Agent in Tacoma, Washington

“After a point in time, when you’ve been working as an agent you acquire all the skills and knowledge that you need to run a business. Along with all this if a person has an entrepreneurial urge from within just like me no one can stop him/her from starting a business. In the eyes of law, the business and the owner are two separate entities. Being a separate legal entity, the owner of the business enjoys limited liability that shields personal assets. The businesses are granted several tax exemptions in our line of business this means deduction of marketing, mileage for showing houses, and office rent expenses from tax. Also, a separate business account and a special line of credit are experienced by the business. All these benefits lead various brokers to start their firms.”

What are the Benefits of an LLC for a Real Estate Business?

Here are some benefits to creating a real estate LLC:

Protects Your Personal Assets: You may consider getting an LLC for your real estate business if you feel it’s important to protect your personal assets.

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. But if you have an LLC in place, it will limit any damages to your business assets only.

It will also help if your business owes money you are unable to pay. The collector will only be able to put a lien on your business assets, not your personal property.

rinal patelRinal Patel
Co-Founder of We Buy Philly Home
Licensed Realtor in Pennsylvania

“An LLC can limit a real estate agent’s liability by creating a separate entity for the real estate business. The LLC can also put in place contracts and operating agreements which will help to protect the real estate agent from personal liability. This means that if something goes wrong in your business, you won’t be personally liable for any damages or costs.
For example, if a property you’re selling is defective and causes injuries to the buyers, they could sue you. However, if you have an LLC, the lawsuit would be against the LLC, not you personally. This can protect your assets, such as your home or savings, from being used to pay for any damages or costs associated with the lawsuit.
Another benefit of an LLC is that it can help you operate your business more professionally and further establish your credibility in the industry. This can lead to more sales and commissions, as potential clients will see you as a legitimate and reliable business. Overall, an LLC can provide real estate agents with many advantages and benefits.”

 

Improve Credibility: Being able to put ‘LLC’ after your business name looks more impressive to clients and financial institutions. It provides credibility when you are applying for credit, loans, and grants.

stephanie sStephanie Spolydoroff
Freedom Cash Offer
Real Estate Agent in Arizona for 6+ years

“I established a limited liability company to serve at a home buying firm where I can buy as-is or ugly houses then renovate it to sell it for a profit. In this way, I can maximize my real estate skills by working on both sides while earning reasonable revenue. That being said, those real estate agent aspirants should decide whether to acquire a commission based income or a consistent cash inflows. This will absolutely depend on their goals and objectives. As an agent who is liable for every property they are selling, efficient time and project management is necessary. This is to ensure that you can do your job as an agent while setting up your real estate business.”

 

Increased Tax Options: 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 S or C corporation.

Each option differs in how you pay taxes and run your company. Talk to your accountant to determine which works best for you.

rob ransome headshotRobert Ransome
Principal Broker of Ransome Realty Group
16+ years of experience in the real estate industry

“Forming an LLC allows an agent to continue to pay themselves as a W2 employee of that formed entity and can provide a way to keep a normal feeling income in place.  It helps when it comes to the taxes that need to be deducted and adjusting accordingly as your income grows.  It also helps when you go to purchase something where a W2 and past pay stubs are the preferred method of verifying income.  Sometimes self-employed persons have a hard time getting financed because you usually need to provide some sort of profit/loss statement and an average of your income. 
Every agent should have some form of Errors and Omissions insurance that provides coverage in the event the agent is negligent when performing their duties.  In the event that a client pursues the agent further than what E&O insurance will cover, having an LLC could potentially help with how much that client would be entitled to receive from that agent personally.”

 

Management Flexibility: An LLC allows all members to take part in management duties. It also lets businesses hire outsiders to come in and run the company if the members feel this is a wise move.

Jeremy L.Jeremy Luebke
Founder of WeLoveLand
Licensed Broker in Dallas, Texas

“As a broker, I formed my own LLC because I wanted more independence in my work. Being a broker and business owner gives me the flexibility to make my own schedule and work on the projects that matter most to me. But setting up an LLC is not simply a matter of paperwork – it’s something that new agents should think carefully about in order to ensure that they are limiting their liability effectively.

One important consideration when forming an LLC is choosing the type of structure that best matches your business model. For example, some businesses opt for a single-member LLC in order to take advantage of the tax benefits, while others go for a multiple-member LLC in order to reduce risk by spreading liability among several partners. In addition, it’s important to have solid contracts in place with your clients and vendors so that you minimize any risks associated with your transactions. Overall, there are many different ways that an LLC can protect both yourself and your business as you start out on this exciting career path.”

 

Easy Start Up and Upkeep: It is relatively easy to start and maintain a real estate LLC. However, it can get more complicated if you want to turn your LLC into a corporation or another type of separate entity business model.

How Do I Get an LLC for My Real Estate Business?

In,The,Hands,Of,A,Businessman,,A,Neon,Circle,WithYou can get professional assistance in getting an LLC for your real estate business or you can take the DIY route. Either way, here are the steps that are involved.

Name Your Business: You will want to start by giving your business a unique name. You may want to name your business after yourself which will help you become established as a reputable agent in the industry.

However, if you work with a team or want to tell a little bit more about your business in the name you choose, you can go outside the box in finding one that stands out. You can use an online business name generator or do some research to get inspiration.

Once you choose a name, make sure it is available as a web domain on Go Daddy.com before proceeding.

Choose an LLC Registered Agent: An LLC registered agent will accept tax notices and legal documents on your business’s behalf. They will also help you file your Articles of Organization. You may be able to take care of these duties yourself but hiring an agent will ensure you get everything done by the book. They will also ensure your personal information remains private.

File Your Articles of Incorporation: Also known as a Certificate of Formation or Certificate of Organization, this document outlines your basic company details. It needs to be filed for your LLC to become official.

Create an LLC Operating Agreement: An LLC operating agreement outlines how your company operates in terms of ownership and member duties. It can be created with an operating agreement tool which is a free resource that can be accessed online.

Get an EIN: An Employee Identification Number is the number used by the IRS to identify businesses for tax purposes. It’s kind of like a social security number for a business. You can apply for an EIN for free through the IRS.

How Much Does It Cost to Register an LLC?

Legal,Concept,About,Llc,Formation,With,Inscription,On,The,Sheet.The expense of registering an LLC will differ from state to state and can cost between $40 and $200. You may have to pay additional fees if you get a service to file for you. If you choose an online service, such as LegalZoom or ZenBusiness to assist you with filing, it will cost between $40 and $80.

You may also incur extra costs in the form of:

  • Permit and business license fees
  • Publication fees which apply in New York, Arizona, and Nebraska
  • Optional name reservation fees (these are required in Alabama)
  • Optional fictitious name fees (also known as a DBA name)

Which is Better for My Real Estate Business, an LLC, or a Sole Proprietorship?

While an LLC is good for protecting personal assets, it’s not the only option for filing as a business. You may opt for a sole proprietorship instead. This is ideal if your business is owned by just one person and it is very low risk, i.e. more like a hobby than a business.

stephen headshotStephen Michalakos
Licensed Realtor in Florida

“For the first few years I was licensed, I didn’t have an LLC. Like many, I was a sole proprietor just taking commission checks to my name; This isn’t wrong to do by any circumstance, but some of the best advice I received was to create an LLC and run all of my business dealings through it. My previous brokers, CPA, and attorney agreed that the two best reasons to establish an LLC are 1) Financial organization, and 2) an “arms-length” liability. 
1) I created Properties by Stephen, LLC in January of 2021, and since then have run commission checks, expenses and P&L reports through my “business account”. Keeping my expenses organized and unmixed with any personal expenses has really helped allocate advertising dollars, recurring costs, etc. and change my taxable status to an S-Corp. Now I even pay myself a salary from it as an “employee”.
2) Acting as an independent contractor can carry a ton of liability. Establishing an LLC will provide a legal barrier between your business and your personal life should a concern/dispute arise with either. As an agent you are your business, but keeping a degree of separation is smart and doesn’t take much effort with the LLC.”

Should I Make My LLC into a Corporation?

Despite what some may think, an LLC and a corporation are not one in the same. Rather, a corporation is a type of LLC. Running a corporation is complex and it will only be necessary if you need to start relying on outside investors to run your business.

What is a Corporate Veil?

A corporate veil is personal asset protection provided to corporations and LLCs. It must be maintained for the company to keep its limited liability protection.

Do I Need a Dedicated Business Banking Account to Make My Business an LLC?

Yes, a dedicated banking account will help separate your business assets from your personal assets. It will identify which funds are which to ensure your personal assets are not affected by legal matters and debts.

What Tax Options Do I Get by Making My Tax Business an LLC?

Earlier we discussed how turning your business into an LLC can provide increased tax options. This section will delve deeper in what the various options have to offer.

Single Member LLC: A single member LLC will be taxed as a sole proprietor. With this business model, the business does not need to file any taxes. The personal taxes cover both the business and personal income. The taxpayer will need to pay self-employment tax on the money earned unless they are filing on passive income such as a real estate investment.

Multi-Member LLC: A multi-member LLC is an LLC with two or more members. The business will file separate taxes through a Form 1065. Each partner will pay self-employment taxes as long as they business deals in active, not passive income.

peter lucas headshotPeter Lucas
Owner of Relocate To Andorra
8+ years of real estate experience

“One of the most important decisions you’ll need to make when forming your LLC is what type of legal structure you want for your business. There are several different options to choose from, each with its own advantages and disadvantages. For example, a single-member LLC offers limited liability protection for the sole owner, but it may be more difficult to obtain financing and can be less flexible when it comes to taxes. A multi-member LLC offers many of the same benefits as a single-member LLC, but with the added protection of having multiple owners.

One of the key benefits of forming an LLC is that it can help limit an agent’s liability in the event of a lawsuit or other legal dispute. By establishing a separate entity for your real estate business, you are essentially separating your personal assets from those associated with your agency. This can help protect you from financial losses or legal penalties in the event of a claim against your business.”

 

C Corporation: A company with 2 or more members may also file as a C corporation. The company will file separate corporate taxes and pay taxes at the corporate tax rate. If profits are distributed among the owners, they will be taxed again at a dividend rate. This activity is known as double taxation.

Corporation owners do not need to pay self-employment tax, but they must pay payroll taxes on any wages paid to LLC members. They can also keep the money within the business to pay for expenses. If the business takes this option, they will not need to pay taxes on their profits.

S Corporation: An S corporation is another option for businesses with more than one owner. These companies file separate business taxes but they are not subject to corporate income tax. Rather, they must pay a self-employment tax on their individual profits. If an owner works in the business, he or she must be paid regular wages and those wages will be taxed.

marina headshotMarina Vaamonde
Owner of HouseCashin

“If a buyer or seller were to sue you, you could be personally liable for damages if you’re not established as an LLC. That means that you could lose all of your assets if this were to happen.

Setting up an LLC and taking the S-Corporation election with the IRS can also save you money on self-employment taxes. Lastly, establishing an LLC as an agent forces you to separate personal finances from business finances. This is a big mistake that agents make, which makes tax season a nightmare. Operating as an LLC forces you to have a separate bank account so that this doesn’t happen.”

What is the Difference Between a Sole Proprietorship and a Single Member LLC?

As a real estate agent, you also have the choice of setting up your business as a sole proprietorship or a single member LLC. They are similar in that your business must have one sole member to qualify. Also, both offer you LLC protection.

The difference is that a single member LLC is considered its own legal entity, so it offers additional protections as compared to a sole proprietorship. While a single entity is more expensive and more complicated to set up, it offers more benefits in the long run.

What is the Best Type of LLC for a Real Estate Agent?

Business,,Technology,,Internet,And,Network,Concept.,Young,Businessman,Working,OnThere are many types of business structures that are suitable for real estate agents and the one you choose will depend on your professional situation and how many people are involved in the business. However, the consensus is that an S corporation is the best way to go for the industry.

S corporations are preferable to C corporations because the income, deductions and losses go through the shareholders, so they are taxed at a personal income tax rate. This eliminates the need for the paying out of dividends which subjects the business to double taxation.

It also eliminates self-employment taxes that can be twice as much as employee taxes.

However, S corporations have their share of downsides. For one, they require shareholders/employees to be on the payroll. As such, they are subject to Medicare and Social Security taxes.

While these are still lower than self-employment rates, they require advanced bookkeeping as it’s essential that all transactions are processed correctly. It’s advisable to have a skilled accountant on board if you decide to set your company up as an S corporation.

cassi headshotCassie Alongi
Co-Founder of We Buy Any House In California
Real Estate Agent in California for 20+ years

“Doing business under an LLC can help protect against lawsuits, even frivolous ones.  This is the reason I now do business under an LLC.  It actually saved me from being sued (thank goodness it was dismissed).  I had a squatter that took possession of a house before it came into my asset inventory.  They decided to sue me, which my LLC took the brunt of the suit.

Another REO agent in my office had this happen to him and this is why I have an LLC.

He had a vacant home that a squatter had moved into and because of a water leak, the water company had shut the water off.  Once the squatter became aware it was a bank foreclosure, he insisted the water be turned on and eventually sued because he said the lack of water made his teeth fall out..  This agent happened to do business under his LLC.

Where this extra protection comes in, is you have E&O insurance for the LLC.  Most brokerages, have a very high deductible, ours at the time was $25k..  When you are sued, you the agent are responsible for the deductible, in my case $25k was very steep.  

Bottom line: Doing business under your LLC and having your own E & O insurance, is an added extra protection during lawsuits.  My current LLC deductible is $2500.”

What are the Downsides of Making a Real Estate Business an LLC?

A,Document,On,Different,Types,Of,Business,Formations,Being,ReadLLCs offer many benefits, but they come with their share of downsides. Here are some to consider.

Everything Must Be Done By the Book: A judge can structure your LLC so it doesn’t cover your personal assets. This is what’s known as ‘piercing the corporate veil’ and it can occur if you don’t clearly separate your business and personal transactions or if you run your business in a way that’s considered fraudulent.

Self-Employment Tax: Depending on how your LLC is set up, you could end up paying self-employment taxes which are quite a bit higher than other types of taxes. Self-employment taxes will be charged if your company is set up as a partnership, but they will not come into play for S corporations.

LLCs are Subject to Member Turnover: LLCs are contingent on the business owners that created them. If a member leaves the business or dies, or if the company goes bankrupt, the LLC will not be honored. The members can continue doing business together, but they will need to form another LLC.

If you are growing your real estate business, a real estate LLC may be the way to go. It can protect your personal assets, provide tax options, and offer other benefits. It’s a good bet for agents that are serious about taking their companies to the next level.

Do you feel an LLC is the right move for your real estate career?

Chris Heller Headshot

About the Author

Chris Heller brings 27 years of experience in real estate. Chris serves on the AgentAdvice Editorial Board and is the Chief Real Estate Officer at OJO Labs. Chris brings deep expertise having held influential industry positions including CEO of mellohome and former CEO of Keller Williams Realty International.

Last Updated: 12/1/2022

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