Real estate agents should form their own separate business entities (such as an LLC, C-Corp, or S-Corp) because agents essentially run their own real estate business. It’s really that simple. However, I will explain why real estate agents are businesses in both a practical and legal sense, the pros and cons of incorporation, and the relevant Maryland law agents must comply with when forming a business entity. Non-Maryland agents should check their local rules.
How Real Estate Agents Are Practically Real Estate Businesses
In order to be a successful real estate agent you have to be entrepreneurial. Simply put, you what you kill. You don’t have the luxury (and perhaps the boredom) of going to the same place every day to perform the same function for a fixed time period and getting paid every two weeks. Your direct your days and decide what you have to go in order to increase leads and to generate income. In order to be successful you have to come up with a business plan, and then stick to it! What non-business owner has to come up with a business plan!
Real Estate Agents Are Legally Seen as Their Own Separate Entity
Businesses are responsible for deducting their employees’ payroll taxes and submitting the sum to the government. However, for you, this is not the case. You are an independent contractor and you are responsible for calculating your own payroll taxes. In the government’s eyes, you are treated as a separate money making operation from your employer. As an independent contractor, you are treated very similarly to someone with their own business. You’re an unofficial business owner.
Pros and Cons of Incorporation
The con of incorporation is that it costs money and time to maintain a business entity. The pros are legal protection, write-offs, separate bank accounts, and establishing business credit, and more.
Financial Cost To Incorporate and Maintain a Business Entity
In some jurisdictions business entities must file pay to file an additional tax form. For example, The Pendergraft Firm has to file a personal property tax return each year and my county sends me tax bills for having a business. This is optional, but I also pay a bookkeeper and CPA. I’d rather someone else handle my taxes so I can focus on generating income.
Time Cost To Maintain a Business Entity
Businesses entities, particularly ones with shareholders or multiple members, must do board meetings. These take time to do.
Personal Liability Shield
Your Real Estate Agent LLC (or C-corp or S-corp) is a distinct being from you, so it establishes a legal hurdle between your businesses liability and your own personal liability that attackers have to get over. This reason alone is enough for me to want an LLC.
Business Write Offs
Businesses get to deduct their business expenses from their taxes. In your businesses case, this means marketing, office space, mileage from showing all those houses, and more! You may also get to deduct some of your bills if you work from home.
Separate Bank Account
My personal favorite is once you create a business, you can create a business bank account in your businesses name, that is separate from your personal account. The separation of business activity and personal activity personally gives me mental clarity.
Establishing A Business Line of Credit
After your business has been in operation for a few years you can get a business line of credit and use the money to grow your business even faster. Business credit differs from a loan because you only have to pay interest on the money that you actually borrow. You can use this money to grow your business even faster!
You Look Super Official and May Be Taken More Seriously i.e. Branding
How people perceive you impacts your bottom line more than anything else. It’s the difference between Brian Pendergraft vs. The Pendergraft Firm, LLC. By creating your own business entity you’ll be taking a step to towards creating your own brand and unique experience, and to conveying your own message. Pendergraft Firm LLC is about helping real estate businesses increase their real estate activity by providing quality legal and financial services. What are you about? You define it!
Boring Legal Stuff You Can Skip
Here is the Maryland Law That Allows Agents to create their own business entity. With my interpretation below. Quick note, you probably know Md. Business Occupations and Professions Code Ann. Section 17 as the Maryland Real Estate Brokers Act.
Section 17-512. Formation of various business entities by salespersons and associate brokers
(a) In general. With the consent of a licensed real estate broker, one or more licensed real estate salespersons and licensed associate real estate brokers
who are affiliated with the licensed real estate broker may:
(1) organize and wholly own a professional service corporation under the Maryland Professional Service Corporation Act; (2) form a limited liability company under the Maryland Limited Liability Company Act; or
(3) form any other business entity authorized under Maryland law.
(b) Composition of business entities. A professional service corporation may be organized and owned or a limited liability company or other business entity may be formed under this section by any number and any combination of licensed real estate salespersons and licensed associate real estate brokers. However, each shareholder in the corporation, member of the limited liability company, or owner of any other business entity shall be either a licensed real estate salesperson or a licensed associate real estate broker.
How This Effects Business Entity Formation For Agents
I bolded what separates a real estate agent business entity from a standard business entity. In order to create a business entity that does not run afoul of the Real Estate Brokers Act you must (1) have the consent of your broker and (2) all members, shareholders, or owners must be a real estate licensee. You need counsel that can draft business entity documents that understand this rule.
It’s Time To Make It Official!
Pendergraft Firm, LLC. helps real estate agents form the real estate business entity of their dreams. We also can help you with your real estate activities from listing agreements to closings, and everything in between. When you’re ready to make your business official or if you need help with anything legal related to your real estate activity, do not hesitate to contact us!