On my 8th birthday, things took an interesting turn. Instead of party hats and cake, I got a lucky packet. It was exciting. I didn’t know what to expect.
As my eyes scanned that rectangular plastic packet, I could feel my heart threatening to escape my chest. With shaky hands, I opened that packet and stuck my hand in. My face lit up.
What was in the packet? A story for another day. The point is, mystery is exciting. But only if it doesn’t cost you. Mystery in your real estate career is a recipe for disaster.
You may have heard that real estate agents need licenses, but what kind of licenses are they? Do real estate agents need a business license? No, they do not. The only license agents need is their real estate license.
Though they are self-employed business owners, real estate agents must work under licensed brokers. Now, this group of agents is required by law to obtain a business license.
In this article, we’ll delve into why real estate agents should get business licenses and what types they might require. By reading on, you will gain a clearer understanding of the legal requirements for your profession, knowledge that could save you from future headaches. So buckle up as we venture into the intriguing realm of real estate licensure!
Forming an LLC
One thing is clear, you cannot sell, list, or even show property in the United States without a license. Of course, the only exception is if the house in question is yours. But real estate agents need licenses: real estate licenses.
But that doesn’t mean you cannot get a business license.
As a real estate agent, you are already operating as a sole proprietor. This means that you already own a business and have full control over its operations. However, this also exposes you to potential liabilities, which can be mitigated by incorporating your business.
Incorporation offers several options. But one of the best for realtors is forming an LLC or Limited Liability Company. An LLC provides protection from personal liability in most instances if the business incurs debt or is sued.
It’s like an umbrella on a rainy day, it won’t stop the rain. But it will definitely keep you dry.
Irrespective of the cushion incorporation provides, forming an LLC is intimidating, especially when you think of the legal jargon and overwhelming paperwork. But think of it like baking a pie: with the right tools and guidance, anyone can do it!
Here are some simple steps to get you started:
Step 1: Choose a unique name for your LLC that complies with your state’s rules. Step 2: File formal paperwork, often called ‘articles of organization’ and pay the filing fee, which varies from state to state. Step 3: Create an Operating Agreement outlining the ownership and operating procedures of the LLC. Step 4: Obtain necessary licenses and permits applicable to real estate businesses in your area.
So there we have it! You are incorporated.
For the cautionary line that has become my signature: before you make a move, check with your real estate licensing body, broker, and attorney to ensure this type of move is welcome in your state.
Benefits of Incorporating
Forming an official limited liability company (LLC) to house your real estate practice offers an array of advantages over operating as a sole proprietor. But below, I will give you the quick trio:
Limited Liability Protection
LLC status grants protection of personal assets like savings accounts or property holdings from any business disputes or claims tied to your industry dealings. Read further into the phrase, and you will understand why it’s a good option for agents.
Limited liability means any liability resulting from your real estate operations is limited to the company. By containing real estate operations within a designated LLC entity, you shield other finances should legal actions specifically target your company.
As an independent contractor you are your business. There is no demarcation between your personal and professional assets. If sued, your personal property can count towards retribution.
But if you take cover in the incorporated arms of an LLC, you limit your liability.
Picture this: You just closed on a property when suddenly, an unforeseen legal claim arises related to that transaction. With limited liability protection, your personal assets, like your home or savings accounts, are shielded from these potential business debts or claims.
Tax Flexibility
Another benefit lies in tax flexibility. By default, Limited Liability Companies (LLCs) utilize pass-through taxation, where profits and losses flow directly to your personal returns. However, you have the freedom to elect S corp or C corp status.
It is important to select one of these so you can escape being taxed as a sole proprietor. Of the two, S Corp still reigns as the better choice. I answer why agents should choose an S Corp in the article: Can Real Estate Agents Get Unemployment?
Imagine being able to tailor-fit your tax strategy based on what suits your financial situation best. It’s like choosing between different paths in a maze, with each one leading towards its own unique destination.
Professional Credibility
Forming an official LLC can give you a professional credibility boost as a real estate agent. Think about how people perceive businesses versus individuals.
There’s something about having ‘LLC’ attached at the end of a name that elevates perception and trustworthiness. It signals that you’ve taken formal steps not only to protect but also to structure your enterprise properly.
It tells prospective clients and lenders that you are in it for the long haul and invested in your success.
Several testimonials from agents have suggested that incorporation increased the perception of reliability, which helped them gather more leads.
Exceptions to LLC Formation
While forming an LLC is an advantageous business move, it’s important to note that this option isn’t nationally available. In many states, real estate agents are barred by specific laws and regulations from forming LLCs.
California is a prime example of such restrictions. Here, the privilege of establishing an LLC is exclusive to real estate brokers who are interested in creating brokerages and hiring agents under their corporate umbrella.
This means that individual real estate agents can’t independently establish their own LLCs.
However, these stringent rules aren’t set in stone everywhere. State laws are evolving with time.
A perfect illustration of this progression is Texas, where recent legislative changes have broadened the horizon for real estate professionals. As per the new provisions effective from 2024, real estate agents in Texas will be able to register an LLC with the Texas Real Estate Commission.
This pivotal change allows them not only to create their own corporations but also use these entities as conduits for receiving commissions.
It’s clear then that while some barriers exist today regarding LLC formation by real estate agents, doors are slowly opening up across different regions thanks to changing legal landscapes.
Should You Incorporate?
If you have the time or resources to hire the right personnel, then I say go for it. Incorporating your business will require a different tax approach. Although it comes with great tax benefits, you may not enjoy them if you don’t know how to file.
So, unless you have the time to learn the ins and outs of corporate taxation, I’d say stick with the 1040 form and maybe the 1099-MISC where necessary.
Most Skate By with an RE License
Real estate agents generally do not need separate business licenses but rather function with just their state real estate license. But that doesn’t mean they can get one.
Incorporating as an LLC is akin to donning a suit of armor on the battlefield that is real estate. It offers protection, flexibility, and credibility. However, it’s crucial to remember that not all states allow individual agents to form their own LLCs.
Next Steps: Want to further explore forming an LLC as an agent? Consider these key next moves:
1. Research: Know your state’s laws on forming an LLC for real estate professionals. 2. Seek advice: Consider getting advice from legal or financial advisors before making any decisions about incorporation. 3. Start your corporate journey: If not hindered by law, go ahead and incorporate your realtor practice into an official entity.
What are your thoughts on incorporating as a Limited Liability Company? Do you have experience creating one? Share your thoughts below!
If you found this article insightful, why not spread the knowledge? Share it with your colleagues or audience, and let’s start a real estate knowledge revolution.
