Sole Proprietorship vs. LLC: How to Organize Your Real Estate Business (2024 Updated!)

Hands,Holding,Book,With,Title,Sole,Proprietorship.After years of working under another realtor or firm, you may consider going out and starting your very own small business. Congratulations! Now what? The first step is to consider whether you want to be a sole proprietor or an LLC.

Sole proprietorships and LLCs are very similar, but they have some key differences. It can be confusing to choose which one is the best structure for your real estate business, but Agent Advice is here to help. Here’s a guide on the differences between a sole proprietorship and an LLC, the intricate details of both, and which one might be best for you as a new business owner.

Key differences between a sole proprietorship and an LLC

What is a sole proprietorship? 

The most common business structure is the sole proprietorship, and it’s pretty straightforward. The business is run by a single individual, meaning it’s an unincorporated business. Anyone who makes a profit working as an individual is a sole proprietor. Creating a sole proprietorship is simple, and it’s a popular structure for the self-employed, freelancers, entrepreneurs, and small businesses. 

There’s no legal separation between the entity and the owner. What does that mean? First, it means the owner has full control over the business and its income. They can decide what to do with the business and the profits however they see fit. Business profits are taxed like personal income. Second, this means that the owner assumes full legal responsibility for all losses and liabilities. 

Advantages of running a sole proprietorship:

Man,Having,Worries.One advantage of running a sole proprietorship is that it’s really easy to get started. There’s almost no required paperwork to start your business this way, except a license if you need it in your industry—like if you’re a realtor! It’s still recommended you set up a “doing business as” (DBA) name with your state, but this is easy and relatively inexpensive to keep up.

Regarding taxes, sole proprietors have it the easiest, too. Since the owner and the business are one entity, all profits and losses are reported on the owner’s tax return, usually on a Schedule C tax form. 

Plus, unlike LLCs and corporations, you don’t have to file an annual report with the state unless it’s required by your specific industry or jurisdiction. These are meant to keep states in the know about your business information, but since a sole proprietorship fills out income on a personal return, this isn’t necessary. 

A sole proprietor is self-employed, meaning they enjoy some tax benefits on top of all of that. This includes the ability to write off expenses—marketing, travel, entertaining clients—and the ability to deduct the costs of healthcare for yourself, your spouse, and your dependents. You can also open a SEP IRA retirement plan.

Disadvantages of running a sole proprietorship:

Business,Concept,About,Sole,Proprietorship,With,Sign,On,The,Page.The biggest disadvantage of running a sole proprietorship is that you have no liability protection. Because the owner and the business are one entity, it means the owner is responsible for any losses, debts, or lawsuits that may occur. 

Also, banks and investors very rarely invest in a sole proprietorship, so it’s going to be difficult to obtain capital for your business externally without the assistance of friends and family. This lack of outside funds makes it incredibly difficult to scale your business.

Speaking of banks, it’s very difficult to establish loans or lines of credit as a sole proprietorship. Because the owner and business are one entity, any loans taken out for the business are personal loans, which offer far less money and shorter repayment terms. And, as you’d guess, your personal credit score will transfer to your new sole proprietorship.

Last, sole proprietorships by default have far less market credibility than other business types. This is why you should establish a DBA name, as it’ll usually rectify that issue. However, this is a continual extra cost that’s unnecessary for other business structures. 

What is an LLC? 

A limited liability company (LLC) is kind of the in-between of a sole proprietorship and a corporation. There’s a large spectrum of different LLCs, but we’re going to be talking about single-member LLCs. Just like a sole proprietorship, an individual owner controls the entirety of a business. However, while a sole proprietorship considers the owner and business one entity, an LLC considers the two separate in terms of liability, which protects the owner’s personal assets.

Many sole proprietorships end up turning into LLCs over time, especially if they’ve had to handle a lawsuit on their own. The owner still has control over their business, and it’s a lot easier to set up than a corporation. However, you do have a lot more paperwork to deal with than a sole proprietorship.

Advantages of running an LLC:

Llc,Limited,Liability,Company.,Business,Strategy,And,Technology,Concept.As mentioned, LLCs enjoy liability protection against commercial debts and lawsuits. This is possible due to the separation of personal assets and business assets. As long as you follow LLC protocol, your personal assets can’t be seized for your company’s debts or lawsuits.

Plus, LLCs automatically obtain higher market credibility without the need for a DBA. This means that if you’re looking to establish yourself as a trustworthy business immediately, an LLC is a great choice. 

It’s a lot easier to secure equity as an LLC, as banks and investors see less risk in putting money into them. Plus, you’ll be able to take out small business loans rather than just personal loans this way. These are typically higher amounts and have longer repayment terms, making them a lot more useful for your business. 

Filing taxes as a single-member LLC is also a lot more flexible. You can choose whether to be taxed as a sole proprietor—all profits and losses go to the owner’s personal tax return—or choose to be taxed as a corporation. This gives you many options to fit your preference. Plus, you can still enjoy the benefits of self-employment during tax season. 

Disadvantages of running an LLC:

Llc,Operating,Agreement,,Pen,,Glasses,And,Calculator,On,DeskFirst off, an LLC must file for state licenses and paperwork along with any industry-specific licenses. You’ll also need to send in and pay for annual state filings. Depending on the industry you’re in, you’ll have to deal with federal, state, and local governments to run your business, which can be a serious hassle that sole proprietors don’t have to deal with.

As an LLC, you don’t only have to pay personal federal, state, local, and FICA taxes; you might also have to pay state business taxes—depending on where you are—and unemployment taxes to the federal government—as you’re not technically employed.

Overall, LLCs have higher associated costs for filing taxes and administrative tasks than sole proprietors, adding to the increased paperwork and government bureaucracy.

How do I know if I should operate as a sole proprietorship or LLC?

The choice between the two of these is mostly a matter of personal preference if you’re a solo agent. As you can see, there are advantages and disadvantages to both. But certain agents should consider one over the other.

Broker,Giving,Keys,Of,New,House,And,Handshaking,With,CustomerA sole proprietorship is for those that want to start their business immediately without jumping through bureaucratic hoops. If you want to start your business for very little cost, a sole proprietorship is the cheapest way. Also, if you run a low-risk and/or low-profit business, the lack of liability protection is less of a risk. 

It’s hard not to see the many advantages of an LLC, though. If you’re worried about legal liability, risk management, and protecting personal assets, an LLC is for you. An LLC is also a great starting point to scale, as you can reap the benefits of instant credibility and small business loans. 

While many claim that LLCs are always the best choice, some should choose a sole proprietorship, as the costs of the LLC may not be worth it. Also, just because an LLC provides liability protection doesn’t mean an attorney can’t find some way to target your personal assets. Plus, some courts may not look favorably on a single-member LLC.

This is all consideration for a solo agent. If you’re a small team or brokerage, you should start a multi-member LLC. 

Taxes, liability, management, and more!

With introductions out of the way, let’s get to know each of these a little more. As discussed, sole proprietorships and LLCs differ a lot when it comes to tax filing, liability protection, and day-to-day management. Let’s get into the nitty-gritty.

Filing for taxes with an LLC and sole proprietorship

Mid,Adult,Real,Estate,Agent,Showing,To,His,Clients,WhereRegardless of which one you choose, you will be filing your business income and expenses on your personal tax return. Also, either one requires an Employer Identification Number (EIN) if you hire any employees; if you don’t hire employees, you can still get an EIN to use instead of your social security number on your taxes. 

Filing as a sole proprietorship:

A sole proprietorship has an easy tax filing process. It’s a pass-through entity, meaning you don’t have to pay taxes before you receive the money from your business. When you file your income tax return, you’ll report your business income and expenses using Schedule C on your Form 1040. Then, the net profit passes through to your tax return, and you can move on as needed.

Pass entities have a chance to qualify for the Qualified Business Income (QBI) deduction—you can deduct 20% from QBI. However, you should find out if that’s true for your business before claiming this deduction. 

You’ll also have to pay the self-employment tax for Social Security and Medicare. Currently, this is 15.3%. 

Filing as an LLC:

Happy,African,American,Real,Estate,Agent,Working,On,Paperwork,WhileFiling your taxes as an LLC doesn’t have to be much different from above. You still file on Schedule C of your 1040 form. You can still qualify for QBI, and you still pay a self-employment tax. However, an LLC allows you more flexibility by letting you pick how you want to be taxed: as a sole proprietorship or as a corporation (S-Corp or C-Corp).

If you choose to be taxed as a sole proprietorship, profits and losses still flow to your personal return the same as above. If you choose to be taxed as a corporation, it’s the same, but you can reduce FICA taxes by establishing a reasonable salary for yourself. Your salary is subjected to Social Security and Medicare withholdings, and your remaining profits are dividends. 

Liability risks for LLCs and sole proprietors

As a sole proprietor, you’re completely liable for all losses, debts, or lawsuit damages. For example, if someone were to sue your business, they’d be suing you personally and putting your assets at risk. All business decisions are on you, as the owner is essentially the business, and the consequences are on you, too.

For an LLC, though, you can protect your assets when your business is in hot water. For example, if you go bankrupt, only your business assets can be seized. An LLC essentially has the same protections as a corporation but less required administrative work. 

Managing your LLC or sole proprietorship

Professional,Bearded,Chubby,Man,In,Formal,Outfit,With,Clipboard,DemonstratingSole proprietors have a ton more freedom when it comes to how they manage their businesses. As a sole proprietor, you get to call the shots without input or permission from partners or shareholders. You also don’t have to worry about all the legal documents and government bureaucracy weighing down your business. That doesn’t mean you don’t need to run your business legally, but there’s a lot less red tape.

If you run a single-member LLC, it’s much the same, but you do have to suffer through federal, state, and even local paperwork and fees. Plus, you’ll need a registered agent, the person who manages legal docs for your LLC. If you run an LLC with multiple owners, your operations will be outlined in an agreement, which may include profit sharing, voting rights, and each members’ stake in the business. There’s a lot less freedom associated with LLCs in this way.

What you should know if you want to start a real estate LLC

We come to the big question: what should you do if you want to start a real estate LLC? A real estate LLC allows you to buy, sell, and rent out properties and maintain control over your profits without being personally liable for them. Plus, if you start a multi-member LLC, you can own properties with other investors. 

Real,Estate,Agent,With,House,Model,And,KeysIt’s a good deal, but there are some things to keep in mind. 

Transferring properties you already own may trigger a due-on-sale clause. They’ll demand the rest of the loan payments at that time, or else they could foreclose on the property. This can be avoided if you ask your lender to waive the clause. You’ll still be the owner through the LLC, right?

Just because you’re not personally liable doesn’t mean all your actions are legally protected either, so be careful. If you guarantee anything personally and your business goes bankrupt, the lender will come for you. If you’re a landlord and don’t fulfill your responsibilities, you can be held personally responsible for tenant damages.

To start your LLC, you’ll register your business name, choose a registered agent—you can choose yourself if you have the legal know-how—and complete all your necessary paperwork.

Quick Guide:

There are a few reasons to open up an LLC instead of operating as a sole proprietorship:

  • You want to expand the company to more than one owner in the future, which is easy with an LLC
  • You want to protect your personal assets from potential financial and legal liability
  • You want to take advantage of any applicable local, state or federal tax benefits that come with forming an LLC

Sole Proprietorship Vs. LLC: Upfront Registration Costs

As a business owner whether you go with a sole proprietorship or an LLC, the formation process and its associated costs will largely depend on what state you’re in. There typically is no cost to start a sole proprietorship. However, LLC owners are required to pay a filing fee when the business is registered with the state, that price can range between $50-$500.

Agent Advice can help you elevate your business

We hope this article has given you some good advice on whether you want to start a sole proprietorship or an LLC. Starting your very own small business is an exciting first step into the world of real estate, but then you might need insight into how to run and grow your business. 

Agent Advice is for agents, by agents. We have tons of resources to help you understand the intricacies of the real estate business, find the best tools, and elevate your real estate game.

About the Author

Jim Gray got licensed in 2013 and sold 57 houses in his first year. Over the next 6 1/2 years he went on to sell 437 homes with a small team. He went on to manage the lead generation department of the 13th largest expansion team at Keller Williams and designed lead generation and conversion systems for 60 agents in 7 locations in 4 states that drove 600 home sales in a 2 year period. Jim currently does real estate team development and coaching for some of the largest real estate teams in the country. 

Last Updated: 12/29/2023