LEGAL PROTECTION
An LLC member is not personally responsible for business-related lawsuits or debts incurred by the LLC. Creditors or anyone filing a lawsuit against the business can only collect damages from the LLC’s assets, not from the owner’s assets. So, if a home seller or buyer files a lawsuit against a real estate agent operating with an LLC, that LLC is held liable for damages while the agent personally is not. That means the real estate professional’s house, vehicles, savings accounts, and other property will be protected if legal action is taken against the LLC.
Buyers and sellers bring lawsuits against real estate agents and brokers for a myriad of reasons. In a litigious world like we live in, examples of cases we have seen include:
Data and Security breaches
Real estate agents and brokers have a lot of their clients’ personal data. Even with cybersecurity protections in place, breaches to client data happen.
Breach of Contract
You have a contract with your clients and your clients eventually have a contract with the buyer or seller. Those contracts have timeframes within which to perform, such as mortgage contingency dates, inspection dates, et cetera. Failure to properly notify and remind a client can subject you to legal claims and lawsuits.
Negligence
It doesn’t matter if you unintentionally make a mistake with paperwork or failed to disclose a fact about a real estate property. You are still subject to a negligence claim. A real estate property’s condition, including environmental and hazardous issues, often create problems.
Breach of Duty
Clients, on both the buyer side and seller side, can make claims against real estate professionals that the clients best interests were not followed.
False and Misleading Advertising
Advertising is a key to survival for agents and brokers. This includes email marketing campaigns, online postings and social media. Advertising with any false information, even if inadvertent, can lead to legal problems.
Discrimination
The United States protects a number of “classes” of individuals against discrimination when buying or renting a real estate property.
Unauthorized practice of law
Real estate agents and brokers need to be very careful not to make representations or provide information that is considered legal advice or services. This can get tricky when real estate professionals are preparing and reviewing contract. It can lead to legal action.
TAX FLEXIBILITY
Using a limited liability company provides you with the most tax flexibility.
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 your applicable individual income tax rates and subject to Self-Employment taxes (which includes Social Security and Medicare taxes).
But, if the LLC meets certain IRS eligibility criteria, you can file an S corporation election with the IRS. With S corporation tax treatment, you are not subject to the Self-Employment tax. Sounds complicated? Let us help. Legally avoiding self-employment taxes could save you up to $10,000 on the first $100,000 you earn in a year!
COMMINGLING OF BUSINESS AND PERSONAL MONEY
Its often a struggle for real estate professionals to avoid combining their business finances with their personal finances. This is called commingling and can result in you having personal liability. Example, using Zelle or Venmo to reimburse a colleague for a business expense. We find that having an LLC with a business bank account and separate finances helps lower your chances of personal liability from the commingling of funds.
PROFESSIONAL CREDIBILITY
Buyer and sellers of real estate want to work with a knowledgeable, professional agent or broker. Often the real estate is that client’s largest asset. When a real estate professional operates as an LLC, clients may perceive the agent as more professional and legitimate. Establishing your own business entity can greatly increase client trust, loyalty and confidence.
BUSINESS SIMPLICITY
There are a number of types of business entities that can be setup, such as corporations, limited liability partnerships and limited liability companies, that provide the business owner with personal liability protection. The reason to go with an LLC is that it does not have as many startup requirements, governance rules and ongoing duties as other types of entities.
LOW AUDIT RISK
A limited liability company with S Corporation tax election will likely give you a lower risk of being audited. While an additional business return may have to be filed, the cost of that return is greatly outweighed by the risk of an audit.
SELF-DIRECTED RETIREMENT ACCOUNTS
Are you missing out on building retirement accounts? Just because you are self-employed doesn’t mean you are out of options. Out of profits from your business, you can invest money from the LLC into a number of options. These include Traditional and Roth IRAs, Solo 401(k)s, SEP IRAs, SIMPLE IRAs and other defined benefit plans.
FOREIGN AND MULTIPLE OWNERS
Both residents and non-residents of the United States are eligible to be LLC owners. Further, LLCs 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.