Are you a real estate agent who wants to start their own business? Or are you interested in investing in real estate?
If so, you’re in the right place. You will either need to incorporate or form an LLC to start your real estate business.
In this article, we’ll discuss how forming a legal entity, (by forming an LLC or incorporating a real estate company), offers a number of benefits for your business, employees, family, and yourself.
Why is Incorporating a Real Estate Business a Good Idea?
Many real estate agents work as individuals without incorporating a company. They sell homes, offer rentals, and work on other real estate projects – all of this in their personal names.
However, when conducting any business, you need to evaluate how much risk is involved with the work you are doing. Ask yourself – What are the worst-case scenarios? How can you prepare to protect yourself from them?
Working on real estate projects as an individual comes with risks and personal liabilities. You should form a legal business entity such as an LLC, or incorporate your real estate business instead.
1. Incorporating a Company Will Help Protect Your Personal Assets
By pursuing real estate projects in your name, you are liable for all loss, fraud, and other debts that your business or project faces.
If you buy real estate and rent it out, many liabilities are possible there that should be proactively addressed by forming a legal entity (LLC or Corporation), legal contracts, and insurance.
By incorporating your real estate business, you will be able to protect your personal assets such as your home, car, personal bank accounts, and other properties against company debts.
Incorporating also reduces the risk of an IRS audit, which is why many real estate investors take the plunge.
Once you’ve obtained an EIN, you can (and should) also open a business bank account to keep your business finances separate from your personal finances. Some banks also offer incentives for opening a new bank account, which can help grow your business further.
2. Incorporating a Real Estate Company is Easy with GovDocFiling
Are you overwhelmed by the paperwork and legal requirements?
There is no need to be.
Incorporating a real estate business is easy.
Here’s the process you need to follow to incorporate a real estate company:
- First of all, you should choose a business name that is unique, has not been trademarked by anyone else, and is available as a domain.
- Find and appoint a Registered Agent, who should have a physical street address in the state where you incorporate your business. They will be responsible for receiving all legal documents on the behalf of your business so you should ensure that they are trustworthy and reliable.
- You will need to file Articles of Incorporation with the Secretary of the State’s office to register your real estate corporation (or Articles of Formation for a real estate LLC).
- Along with state filing, you also have to apply for a federal EIN (Employer Identification Number) with the IRS. This is a unique, nine-digit number used for tax filing and reporting purposes.
Remember, all corporations need an EIN even if you don’t have any employees and are operating your business as an individual.
- Draft your Corporate Bylaws to define how your real estate business will function. This document should clearly define internal rules and procedures for your corporation.
This is to ensure that all of the shareholders, board of directors, executives, and employees are aware of how the business will run to avoid any disputes later.
- You should also check with the Secretary of the State’s office to find out if you need any specific permits or licenses to incorporate and operate your real estate business within the state. If needed, you should fulfill the requirements to acquire those business licenses.
One simple online application makes it easier for you to incorporate your real estate business and also offer expedited processing without any additional costs.
3. Incorporating a Legal Business Entity Offers Tax Benefits
Incorporating a legal real estate business entity helps you save money on taxes. It enables you to enjoy the benefits of tax deductions.
Without incorporating a business, you’re not eligible to deduct operational expenses such as office rent, insurance, and employee salaries (if any). But as an incorporated business, you are able to deduct the cost of operating your real estate business from your company profits.
Here’s one thing you should be aware of:
Corporations are subject to the double taxation of profits.
If you form a corporation for your real estate business, you will be liable to pay a 21% corporate income tax. Along with this, you need to pay personal income tax as a shareholder on the dividends of company profits that you receive.
Want to save yourself from double taxation?
There’s a way out.
As the owner of a corporation, you can avoid double taxation by paying yourself a salary or a year-end bonus that will leave the corporation with $0 earnings.
This is where it can get more complicated and consulting with an accountant is highly recommended.
4. Incorporating a Business Makes You Look Professional
Whether you sell or rent homes and office spaces, people want to know they are doing business with a legitimate company.
Incorporating a real estate company can make you seem more professional and get more people to trust you. The added layer of credibility can help you attract more high-quality clients and boost your listings and sales.
Not just clients, even you will take your business more seriously.
Yes, you read it right.
Many real estate agents and investors admit that they started taking their businesses more seriously after incorporating a company. Separating your personal and business affairs can make you feel more responsible, active, and dedicated to driving growth.
If your state allows you, you can also transfer your personal real estate license as a real estate agent into your new corporation (or LLC). However, you need to check with the state’s Real Estate Commission or Board about any restrictions, qualifications, and fees required to transfer the license.
5. Incorporating a Company Makes It Easier for You to Attract Investors
By incorporating a company with the proper paperwork, you are more likely to attract investment from banks and other financial institutions for current and future properties.
By forming a corporation, you can offer stock in your company to people who invest their money. A corporation can have as many shareholders as you want, which makes profit-sharing easier. This feature can help your corporation attract wealthy real estate investors.
Incorporating your real estate business offers a number of benefits but is it the only way to invest in real estate projects?
Not at all.
You can also choose to form a limited liability company as a real estate investor.
Should You Consider Forming an LLC Instead?
Some real estate investors purchase properties and rent them to vacationers or other people. But investing like this comes with a serious liability risk if you don’t consider forming a real estate LLC.
While investors can also choose to incorporate, the flexibility of an LLC real estate holding company is great. It also allows you to reduce your exposure to financial risk.
Furthermore, forming an LLC doesn’t require some of the legal formalities and recordkeeping of a corporation. You can enjoy the benefits of pass-through taxation or choose to file taxes as an S-Corporation.
Wondering how to form an LLC?
The process of forming a limited liability company (LLC) is quite similar to the one needed to incorporate a real estate business. However, the documents are named differently.
To register an LLC, you need to file Articles of Organization with the Secretary of the State’s office. Similarly, in place of Corporate Bylaws, you need to create an LLC Operating Agreement to define the roles and responsibilities of all of the members of your LLC.
And the best part?
It’s easier to form a limited liability company (LLC) with us. You just need to fill out our simple LLC formation application online to start the filing process at an expedited rate.
Are You Ready to Incorporate or Form an LLC for Your Real Estate Business?
If you want to grow your business as a real estate agent and earn more by renting and selling properties, you should start by setting up your own company. If you need assistance with state filings or your EIN/Tax ID application, feel free to check out our pricing and fees for different filing packages.
Do you have other questions about incorporating your real estate business? Get in touch with our experts. We’ll provide you with the best possible solutions as soon as possible.