Recently, in San Diego, California, an unhappy homeowner sued their realtor when they discovered a similar house down the street had sold for a substantially smaller sum. This highlights some of the ongoing challenges today’s real estate agents and brokers are facing.Many real estate professionals feel that the fact they carry E & O (errors and ommissions) insurance will protect them in the case of a lawsuit. Unfortunately, there are two difficulties with E & O insurance. The first is it ONLY covers errors and ommissions! So if the lawsuit does not fall in these two areas, the agent is not covered. Secondly, most E & O insurance is capped and will not cover a larger suit.As an alternative, many real estate agents are looking newly into setting up corporations or LLCs to protect their businesses. The use of these entities create the corporate veil, which effectively shields the real estate agent from having their personal assets threatened by a business lawsuit. This is especially crucial in community property states, like California or Nevada. In these states, if the real estate agent is sued, the litigant can not only go after the agent but also their spouse. In some states, up to 25% of the spouses wages can be garnished for a 10 year period to meet the lawsuit. Through the use of a corporation or LLC, the damages would be limited only to whatever income is being held in the corporation or LLC, rather than allowing the litigant to tap into the agent’s personal assets.In addition, there can be significant self-employment tax savings for the individual agent if he or she is netting over $60,000/a year in 1099 income. For an agent, netting $100,000 a year, this can put an additional $7,0000 to $10,000 into the agent’s pocket for their use, instead of handing it over to the IRS!Warning !!! Every state has different requirements for the incorporation of real estate agents and brokers. Take time to educate yourself by calling the Real Estate Division in your state to find out the regulations before you set up your corporation or LLC. For example, in California, only S or C corporations can be filed and they can be called any name that the agent would like, depending on availability. One state over in Nevada, a real estate agent needs to set up either an LLC or a Professional Corporation, with the name used on their license. Arizona has different laws, as well.In the real estate classes that we teach in Nevada, over 50% of the agents who are incorporated have set up their corporations incorrectly (including those using an attorney or CPA!) In a recent class we taught at the Greater Las Vegas Association of Realtors, we found one of our students had spent over $2,000 with a real estate attorney, recommended by her broker and her corporation was set up incorrectly. They then need to reincorporate to be in compliance with the Nevada Real Estate Division.Once your corporation or LLC is formed, in many states, you can place your licenses within the entity, allowing you the corporate protection so crucial in today’s market.
At a certain point in time many business owners decide to establish limited liability companies or partnerships rather than a conventional corporation, but they may need some assistance with getting LLC information. Another word for partnership is a firm, and is descriptive of the number of people assembling to form a company or professional service of some kind. Corporations are quite rule oriented in the way that they are created, but limited liability companies and partnerships provide for management to be divided, profits to be shared, and ownership rights to be modifiable.Partnerships are typically one of two basic kinds. The first variety is named a general partnership and is open to full liability. This means if a company is unable to deal with what it owes, the lenders are able to collect payment from the partners’ personal belongings. What’s more, in a general partnership, the partners run the business and are mostly in charge. This is similar to having a president and other authority figures in a corporation.Limited partnerships are not subject to full liability in the same manner that general partnerships usually are. The limited partners will not need to personally address the debts of the company. Junior partners in a limited partnership may find perks from the company due to their ownership rights; however, they do not typically get involved with the overall management of the company. All partnerships want to provide at least one general partner so that the business is able to run smoothly without interruption.Given small companies in the United States, limited liability company or LLC arrangements are quite popular. LLCs put together the limited liability attributes of a corporation with the owner profit sharing features of a partnership into a unified business arrangement. One benefit to an LLC that is not available in other kinds of arrangements is that management and profit authority are flexible. All the owners will usually need to agree to lengthy contracts that dictate exactly how the various authorities are split among the owners. Because it can be extremely difficult to comprehend one of these documents, an attorney often has to be hired to write up the contract.This kind of contract spells out precisely how profits are going to be shared among all the partners. In a corporation arrangement, stockholders acquire a part of the profit that is calculated by how many shares they have purchased. In a LLC or partnership arrangement, the profit is not required to be shared based on how many shares each owner has. How much money owners have poured into the company is merely one of many criteria that goes into determining how much money each owner will receive.