Real estate agents are the prototypical self-employed workers who could find themselves paying an unreasonable amount of taxes at year's end if they’re working only on a 1099 tax agreement from their parent employer. All personal income taxes are assessed based on total commissions paid to them by the company.
However, incorporating a real estate agency can make a significant difference in the amount of taxes paid. Incorporation also establishes a corporate entity to serve as a separate cash flow center while insulating personal assets and wealth from being attached otherwise.
The benefits of being incorporated are great, and the potential downfall of not being incorporated could be catastrophic even for an already viable and successful business operation.
While all startups may not be ready for incorporation immediately (based on business activity level), it’s still not a bad idea to consider incorporating from the very beginning. This sets the parameters for doing business before any cash flow inputs are generated, meaning that tax liabilities are already established.
Incorporating also helps avoid the self-employment tax associated with being merely an agent of an already established realty corporation. In addition, it helps protect your personal assets in the event of being sued for any errors made in the process of conducting business.
Many new real estate agents often don’t realize they need errors and omissions insurance protection for their business because they’re technically professional service workers. Being incorporated immediately with proper corporate protection is vital to the success of any new realty business.
All real estate professionals who are already operating successful agencies should consider incorporating as soon as possible. The limited liability protection can be very important, even when it’s a requirement to pay taxes on the incorporated business entity every three months. This is especially true for agents who are experiencing windfall profits from a solidly anchored business.
While there is a dual tax burden to a certain degree, the payments made through the year are applied on corporate tax burden of 15 percent instead of the potentially 35 percent tax requirements of being self-employed. Draws taken on the company as owners income become significantly less and all write-offs are available for the S corporation. This means that both the incorporated entity and the owner can benefit from reduced tax requirements while ensuring that the business is also protected regarding taxation in times of increased cash flow.
Highly successful real estate agencies will regularly need to retain extra agents to help handle volume when the business is in peak times. This could put a self-employed real estate professional in a serious predicament when adding sales staff, but having the business already incorporated means the new additions can be listed as employees of the company and not the owner per se.
Incorporating is serious structural advantage for the owner because any employment-related claims are attached primarily to the corporation and not the owner, once again protecting personal assets significantly unless there are extenuating circumstances. Limited liability partnerships could also be a good business decision, but incorporation with a vertical command structure and business authorization sets the terms in writing from the very beginning of finalizing the business transition.
Always remember that sooner is better than later when it comes to protecting your real estate business because even one high-value sale can generate a sizable commission. When sales are completed on a weekly basis, the need for protecting individual assets becomes vital. This is especially valid for the real estate agent who had significant wealth before beginning an established agency.
Even though this legal move should be evaluated annually, it’s often best to make the decision and start the process during the year so the tax benefits for two tax years can be applied to company cash flow, essentially doubling tax liability protection with two years of exemption and operational expense benefit. The tax burden is also easier to manage at the end of the year when taxes are officially calculated with consideration for quarterly payments toward the total tax obligation.
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