Choose a Business Entity Most Advantageous for Your Real Estate Enterprise
As a real estate agent handling huge dollar transactions and steering life-changing commitments for your clients, you may have wondered if setting up a business entity would solidify your credibility. The answer is a resounding YES! Not only that, just like any other independent contractor or self-employed professional, a business entity can safeguard your personal assets as well.
Keep in mind, in the State of Florida, to open a brokerage, a real estate agent must obtain a broker’s license. This requires completing a pre-licensing course, passing a state exam, and completing a background check. The person becoming a broker will also need to have at least two years of experience as a licensed real estate. Brokers and sales associates can own a brokerage but cannot register as the director, officer, or general partner. However, if acting as an associate within the brokerage, they must be registered under one of these titles.
Additionally, according to Statute 475.161, a real estate broker associate or sales associate may only be licensed as one of three business types, a PC, an LLC, or a PLLC. However, a brokerage may be run as a Corporation, a Partnership, or as a Sole Proprietorship.
Business Set Ups for Real Estate Companies
- The Sole Proprietorshlp (SP)
This is the most basic business structure, usually favored by businesses where just one person is involved. This is a usually a corporation for a licensed professional such doctor or electrician, who has no interest in running a large business and they are quick, easy, and inexpensive to set up. In a Sole Proprietorship, there is no distinction between the business and the owner, so personal finances can be intermingled. Since it’s just you, there are no unemployment taxes for you as the business owner. - The Professional Limited Liability Company (PLLC)
While the PLLC has different requirements for registration, it is effectively run like a Sole Proprietorship. However, the Sole Proprietorship does not have liability protections whereas the PLLC does have limited liability protections and its members are not personally liable for business debts and lawsuits. But, the PLLC does not protect you against claims of malpractice or wrongdoing. Additionally, because Florida has mutual recognition with 10 states that you can do business in as a real estate agent, a disadvantage of a PLLC is that you cannot offer services across state lines. - The Limited Liability Company (LLC)
The LLC type of business structure affords both tax benefits and liability protections. If the business is found to be liable, they cannot come after the LLC’s members personally. That means your personal assets are protected. There are also tax savings to be had. An LLC allows you to avoid double taxation, where you are taxed at both the federal and state levels for the same source of income. It’s what the IRA considers a “pass-through entity”, meaning it does not pay an income tax on its own. Instead, the required tax “passes through” to each of the LLC’s owners’ personal tax returns, and its profits are taxed according to each owner’s individual income tax rate. An LLC can have an unlimited number of members and subsidiaries; and its members do not have to be U.S. citizens or residents. An LLC can also register to do business in multiple states. - The Corporation (PC)
Corporations, while being the most common type of business entity, are much more difficult to set up and have stricter requirements than LLCs. Corporations are separate from their owners and they are responsible for their own taxes. There are two types of corporations; C Corporations and S Corporations. The main difference between the two is that C corporations are subject to double taxation, while S corporations are not. Like an LLC, members of a corporation are generally exempt from any legal or financial liability. - The Partnership
Partnerships are entities that are owned by two or more people. Each partner contributes capital, skill, labor, or property to the business. The profits are shared among the partners. There are two types of partnerships: Limited Partnership (LP) where specified partners are only liable for persona negligence, not negligence done on the part of the business. This means their personal assets are somewhat protected; and a General Partnership (GP) which divides the business either into predetermined percentages or evenly. These percentages must be agreed upon and recorded beforehand. Partnerships generally follow the pass-through taxation model, where taxes are applied based on each partner’s personal income instead of the company’s revenue.
Why the LLC is Popular with Real Estate Agents
As you can see, each business type has its own unique advantages and disadvantages, and the entity you choose impacts your legal liability, taxes, money and a host of other important factors. For those reasons, any real estate broker attempting to set up a company is well advised to discuss his or her personal situation with a Florida real estate attorney.
A lone agent can choose to go with a Sole Proprietorship or PLLC, still, the most popular choice of a business type for real estate agents is likely the LLC due to its ease of use, flexibility and extra liability protections. While LLCs require a bit more paperwork to establish than a Sole Proprietorship, the benefits often outweigh the inconvenience. An LLC can be the better choice if you intend to be the sole owner with no plans to bring in any outside investors, and would like the benefit of the fullest protection of your personal assets.
Benefits of a LLC for a Florida Real Estate Agent
- Liability Protection: In addition to protection against business debts and lawsuits, the agent is not liable for damages such as failure to disclose a material defect in a home if the buyer chooses to sue. Your personal liability will be limited to the assets held by the LLC.
- Tax flexibility: Under an LLC, agents can choose to be taxed as a sole proprietor, partnership, C-corp or S-corp, whichever is more advantageous for your situation. You can even change how you are taxed as your business changes. For example, if you are the new kid on the real estate block, and not yet making a lot of money, you can tax it as a sole proprietorship to get a lower tax rate.
- Management Power and Authority. The owner/manager of an LLC maintains ultimate control of his business. He runs the business, oversees any staff and the operations, and makes daily decisions. This, and the fact that there are no corporate meetings required, makes it very desirable for the broker who is the powerhouse behind his own success, and would rather spend more time selling real estate than participating in a complex business venture.
- Stack insurance coverage: In an LLC you can often insure multiple companies under one policy. Say your side hustle is property manager of vacation homes; you could put both businesses on one insurance policy. This convenient bundling provides comprehensive protections for multiple entities with similar assets and liability.
If you are ready to take the next step to legitimize your hard work with a business entity, build a better brand and reap the legal benefits of an organized company, it’s time to consult your Florida real estate lawyer. For the best results and your own peace of mind, choose an attorney that has been certified by the Florida Bar in Real Estate Law. To set yourself up as a business, it is essential to follow the proper steps and legal procedure. The Rabideau Klein law firm is one of a select group of Florida real estate companies whose attorneys are certified by the Florida Bar in Real Estate Law. We know the process and will take the proper steps to successfully establish your business.
Disclaimer: While Rabideau Klein intends to make the information in this article as timely and accurate as possible, the information itself is for reference purposes and should not be substituted for competent legal advice.
To learn more about how the Florida Bar Board-Certified Attorneys David E. Klein, Esq. and Guy Rabideau at Rabideauklein.com can help you set up your business entity, call our office at 561-655-6221.