Should You Incorporate Your Real Estate Business?

If you are a realtor and operating as an independent contractor for a broker, there are two good reasons to form a corporation for your realty business: 1) tax savings, and 2) personal asset protection.

Tax Savings

If a real estate agent works for a broker as an independent contractor, and receives a Form 1099 from the broker for reporting of wages, then that agent is responsible for paying 15.3% self-employment tax on those wages to the IRS, along with regular income tax.

By forming an S Corporation, you can avoid paying much of those self-employment taxes.

An S Corporation is known as a “pass through” entity, which means that the profits and losses pass through the corporation and flow to the tax returns of the individual shareholders. Shareholders who actively run an S Corp must pay themselves a “reasonable” salary, which is subject to employment taxes. For example, a realtor who makes a profit of $200,000 a year and works 40 hours a week running the business to generate those profits, might pay herself a “reasonable” salary of $75,000. After that, all other income can be paid out as dividends, and is subject only to income tax.

S Corporations also pay an annual state franchise tax of 1.5% of net income in California, subject to a minimum of $800 per year.

S Corporations are also attractive because they have a very low audit risk.

It is always a good idea to discuss these issues with your CPA.

Personal Asset Protection

Unfortunately, the California Bureau of Real Estate still only recognizes broker’s corporations for the purpose of licensure. If you form a corporation, you will still need to operate through the BRE as an individual. Therefore, forming a corporation will not protect your personal assets from your own mistakes or accidents. However, if you have employees (salespeople, administrative staff, etc.), then your corporation can protect your assets from their actions.

Example A – A real estate agent operates as a sole proprietorship carrying $100,000 in liability insurance. She hires an assistant to sit at an open house. While showing the house, the assistant accidentally leaves a large window open and a subsequent torrential rain ruined the homeowner’s carpet and pricey paintings. The homeowner’s insurance company sued the broker for repayment of $200,000. The broker paid $50,000 through its insurance company but demanded the agent pay the remaining $150,000. Since the agent’s company only has $100,000 in liability insurance, the agent is personally responsible for the remaining $50,000.

Example B – A real estate agent sends his assistant to the bank to make a deposit. The assistant has a car accident while driving to the bank. People in the other car are seriously injured and they sue the realtor for $1,000,000. The limits on his auto policy are only $300,000. The agent is personally responsible for any award of damages over $300,000.

By forming a corporation, and properly maintaining it, you can protect your personal assets from all business related liabilities of your staff, and thereby prevent creditors and claimants from going after
your personal assets to satisfy business debts or judgments. (Note: there are a few exceptions to this general rule which include personal guarantees, payroll taxes and fraud.)

For More Information

For more information about formation, maintenance, and taxation, please call or email Joslyn Stuart, Esq. at The Small Business Law Firm, P.C. (805) 778-0206

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