Real estate agents, just like other self-employed professionals and independent contractors, should consider how to safeguard their personal assets from business-related liabilities. As a real estate agent, you may wonder if you need an LLC to get that level of protection.
Setting up a registered business entity, like a limited liability company, for a real estate business is an excellent first step toward getting peace of mind. Unlike a sole proprietorship (or partnership), an LLC is a separate legal entity from its owners (a.k.a., “members”). So, if a home seller or buyer files a lawsuit against a real estate agent’s business, the LLC is held liable for damages while the agent personally is not. That means, under most circumstances, the real estate agent’s house, vehicles, savings accounts, and other property will be protected if legal action is taken against the business.
Why Legal Protection Is Important for Brokers and Real Estate Agents
The housing market is very active and often tumultuous. Couple that with the fact that we live during a time when people sue for even the most minor of grievances, and it’s easy to understand why asset protection matters!
Buyers and sellers bring suits against real estate agents and brokers for various reasons:
- Data security breaches – Real estate agents have a lot of their clients’ personal data in their hands. Hackers are constantly trying to steal that type of information — and, unfortunately, they’ve gotten really good at it. If an agent or broker doesn’t have sufficient cybersecurity protections in place and clients’ data becomes compromised, clients might seek legal damages.
- Intent to mislead or commit fraud – Real estate agents must take care not to mislead clients. For example, they shouldn’t exaggerate a property’s features in a way that’s deceptively portraying a home to be better than it really is.
- Breach of contract – Lawsuits sometimes occur when a client claims their real estate agent did not perform according to the provisions of their contract. For example, a client might seek legal action if an agent didn’t comply with the time frames stated in the contract.
- Breach of duty – This could lead to litigation if it’s determined an agent hasn’t acted in their client’s best interest.
- Fair housing violations – Another reason real estate agents might be sued is if they violate the Fair Housing Act or other laws that protect against discrimination when buying or renting a home.
- Negligence – Examples of what might be construed as negligence include failing to find and disclose that a home’s underground oil tank has a leak or failure to follow through with paperwork on time.
- Property damage or bodily injury – If a client falls and injures themselves while an agent is showing them a property, the real estate agent as well as the property owner could be held responsible.
- Misrepresentation of a property’s condition or value – These potential grounds for legal action relate closely to fraud or negligence (depending on whether the act was intentional). A lawsuit could occur if an agent or broker claims a property is in better shape — or is worth more — than it actually is.
- Unauthorized practice of law – Agents and brokers must avoid crossing the line of offering what is considered legal advice or services. Creating certain types of paperwork or providing guidance on a matter that only lawyers are licensed to offer could lead to legal action.
The above issues are just a few of the potential legal problems faced by real estate professionals. Some are almost fully within an agent’s control and others not so much! With all that and more to consider, it’s wise for real estate agents and brokers to consult an attorney for guidance on how to best protect themselves. The merits of forming an LLC or other business structure should be part of that conversation!
Pros and Cons of the LLC Structure for Real Estate Professionals
Many small business owners find the LLC structure advantageous over other business entity types. Of course, that doesn’t mean it’s right for everyone. Real estate agents should discuss the legal and tax implications with their attorney and tax advisor to ensure they’re making an informed choice.
Let’s look at some of the benefits and drawbacks of the LLC structure.
- Personal asset protection – As I mentioned earlier, an LLC member is typically not personally responsible for business-related lawsuits or debts incurred by the business. Creditors or anyone filing a lawsuit against the business can only collect damages from the LLC’s assets, not from the owner’s assets.
- Formation and Business Compliance Simplicity – While an LLC and corporation both provide the business owner with personal liability protection, the LLC doesn’t have as many startup requirements and ongoing business compliance formalities as a C Corporation.
- Ownership – Individuals (including non-residents of the U.S.), corporations, and other LLCs, may form an LLC. Also, an LLC may have an unlimited number of owners. This can be beneficial if an agent or broker wants to grow their business beyond their own person.
- Pass-through Taxation – By default, an LLC is taxed on a pass-through basis, with the business profits or losses passed through to the owner’s personal tax return. Earnings are taxed at the applicable individual income tax rates — and those profits are subject to Social Security and Medicare taxes (self-employment taxes). A real estate agent with an LLC may qualify for the 20 percent pass-through tax deduction, introduced in 2018 through the Tax Cut and Jobs Act (Note: That deduction is due to expire at the end of 2025).
- Tax Flexibility – This is another real estate agent LLC tax benefit. If the LLC meets IRS eligibility criteria, its owner can file for S Corporation election with the IRS. With S Corp tax treatment, the business will still be taxed as a pass-through entity, but only wages and salaries paid to the LLC member are subject to Social Security and Medicare taxes. Profits paid as distributions to the real estate agent are only subject to income tax.
- Enhanced Credibility – Purchasing or selling a home (or business property) is a major commitment. People will naturally want to feel reassured the agent or broker they’re working with is professional and experienced. When a real estate agent operates as an LLC, clients may perceive the agent as more professional and legitimate than someone who operates as a sole proprietorship. That effort to establish an independent business entity can garner client trust and confidence.
- Not As Simple as a Sole Proprietorship or Partnership – While an LLC doesn’t have as much startup paperwork or ongoing compliance requirements as a C corporation, it has more to attend to than operating as a sole proprietorship or partnership. An LLC must submit Articles of Organization to the state and retain a registered agent to accept service of process on its behalf. Some states require LLCs to submit an annual report or other forms to maintain the entity every year (or on some other filing schedule).
- More Costly than Operating as a Sole Proprietorship or Partnership – States charge a filing fee to form and register an LLC, whereas they require no business formation paperwork for a sole proprietorship. The LLC must also pay the fees associated with having a registered agent and filing annual reports (if required).
9 Steps for Forming a Real Estate LLC
The tasks involved in creating an LLC for a real estate agent business may vary depending on the state’s laws. Below, I’ve listed some general steps that most agents or brokers will encounter.
- Choose a Business Name for the LLC – An LLC’s name can reflect the business owner’s name, e.g., Danielle Madison Real Estate, LLC, or it can have a more creative name, e.g., Home of Your Dreams, LLC. Either way, it’s important to do a business name search to make sure no one else in the state has already registered an LLC or corporation with the desired name.
- Designate a Registered Agent – States require that an LLC designate a registered agent (also known as a “statutory agent”) to accept service of process on the business’s behalf. By appointing a registered agent, the real estate agent authorizes that individual or company to receive important legal and tax notifications for the LLC. Examples include lawsuit summonses; tax notices from federal, state, and local tax authorities; and LLC compliance filing notifications.
- File Articles of Organization – LLC formation paperwork is called “Articles of Organization.” Some states call their form “Certificate of Organization.” By filing this important document with the state and paying the associated fee, a real estate agent officially registers the limited liability company in the state.
- Get an Employee Identification Number (EIN) – An EIN (a.k.a. Federal Tax ID Number) is a unique identification number for a business (similar to a Social Security Number, which identifies an individual) for taxes and other purposes. Often, financial institutions will require an LLC have an EIN when opening a business bank account. To get an EIN, a real estate agent must file an application with the IRS.
- Create an LLC Operating Agreement – Although an LLC operating agreement isn’t typically a state requirement, it’s helpful to have one in place — especially if an LLC has multiple members. The LLC operating agreement explains how the real estate agent LLC shall be managed, how decisions and disputes are handled, provisions for selling or dissolving the business, and other important details.
- Open a Business Bank Account – Real estate agents with an LLC must keep their personal and business finances separate. Commingling funds can jeopardize the business owner’s personal liability protection because it demonstrates the real estate agent isn’t treating the LLC as a separate entity. Therefore, a court might determine the “corporate veil” (legal separation between the LLC owner and the company) has been pierced. As a result, the real estate agent’s personal assets may be used to settle damages of a lawsuit or pay creditors.
- Update W-9 Forms – If a real estate agent is working as an independent contractor with a broker or firm, they will need to update their W-9 Form to reflect the business name.
- Check-in with the State’s Real Estate Regulatory Agency – It’s helpful for an agent or broker to check with the state commission or board that issued their real estate license about any requirements or restrictions associated with operating as an LLC. Some states may allow a real estate agent to transfer their professional license to their LLC — something that can further strengthen the legal separation between the individual and the business.
- Stay On Top of Ongoing LLC Compliance Responsibilities – Maintaining a registered agent every year, filing annual reports, and renewing required licenses and permits are a few of the tasks a real estate agent with an LLC may need to complete. Failure to keep current on these obligations can lead to losing the legal protections that the LLC structure provides.
My team of filing experts helps business owners across the United States start their LLCs and keep them compliant. We’ve helped many real estate agents, brokers, and investors as they took that critical step toward protecting their personal assets from business liabilities.
CorpNet Can Help You Create Your New LLC
If you’ve determined forming an LLC is right for your real estate business, we can help! From serving as your registered agent to filing your Articles of Organization to obtaining your EIN, and keeping you in compliance, we make the process simple and ensure your paperwork is completed accurately and promptly.