Why Every Real Estate Professional Should Be a Corporation

As an Agent working for a brokerage you are considered an independent contractor.  You are missing out on tax savings and protection for your personal assets.  Since brokerages give you a 1099 form instead of a W-2 you are considered an independent contractor, this means that as far as the government is concerned you are the sole owner of your real estate business.  So, what does that mean?

Risks of Sole Proprietorship

Personal Possessions.  As a sole proprietor business type all of your personal possessions are at risk if there are any legal actions taken against you or your employees.  This includes your home, personal income, retirement accounts and more.  By forming your business into an LLC you gain protection for your assets, but not in all the ways you might hope.  Unfortunately, since you still operate through the BRE as an individual your assets are not safe if you are the one making the mistake.  However, you gain protection if your employees are the subject of a lawsuit.

For example, if you have an assistant showing an open house that is negligent of proper care which results in damages to the property.  Without incorporation you could be held liable for any damages that are not covered or partially covered by your brokers insurance, if you are a corporation in this situation your personal assets are no longer at risk.

Benefits of LLC / S-Corp

Tax Savings.  One of the largest advantages of being an LLC and paying taxes as an s-corp is the tax savings.  Essentially, as an s-corp you end up paying taxes on less of your income.  Instead of paying a self-employment tax on all of your profits, you pay tax on your salary with the rest of the income being distributed as dividends to yourself.

IRS Audit Risk.  Sole Proprietors are the MOST AUDITED BUSINESS TYPE.  No matter how in-order your taxes and business filings are, an audit is always a pain.  According to an article from 2011, the Wall Street Journal found that s-corps are ten times less likely to be audited by the IRS compared to sole proprietors.