Last Updated: October 2, 2024 by TRUiC Team


Should I Start an LLC for My Mortgage Brokerage?

Starting a limited liability company (LLC) for your mortgage brokerage can provide several benefits. 

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For a mortgage brokerage, lawsuits can arise from things like negligent advice (e.g., an employee providing misleading information to customers about their mortgage options).

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your mortgage brokerage seem more credible. 

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Do I Need an LLC for a Mortgage Brokerage?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should start an LLC when there’s any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for a Mortgage Brokerage

By starting an LLC for your mortgage brokerage, you can:

  • Protect your savings, car, and house with limited liability protection
  • Have more tax benefits and options
  • Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Mortgage brokerages will benefit from liability protection because of the risk of lawsuits for fraud or negligence claims, workplace injuries, trademark infringement, financial data breaches, and more. 

Example 1: Your mortgage brokerage owes months of back rent, and the landlord takes you to court. Any settlement will involve the capacity of your LLC to pay. Your personal assets would be protected from legal action. 

Example 2: Cash flow problems in your mortgage brokerage business lead to mounting past-due creditor balances. Some creditors sue. They are likely to win but your personal assets will be safe from any court judgment.

Example 3: Your mortgage brokerage defaults on a loan and the lender obtains a court order. If the lender opts for garnishment, it can garnish your business bank account, but not your personal bank account, since your personal assets are protected.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC’s limited liability protection, you must maintain your LLC’s corporate veil.

LLC Tax Benefits and Options for a Mortgage Brokerage

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business’s net income passes through to the owner’s individual tax return. 

The business’s net income is then subject to income taxes (based on the owner’s tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform. 

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you’d need to be saving about $2,000 a year on taxes.

We estimate that if a mortgage brokerage owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

Mortgage brokerages rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loansgrants, and credit.

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Do LLCs Need Insurance?

All businesses need insurance to protect their business assets — even LLCs. This is because the limited liability protection from an LLC protects your personal assets, not your business assets.

Mortgage brokerages must face the prospect of claims for negligence, as well as damage to their property. General liability insurance will cover such situations, in addition to claims for personal bodily injury and many other risks.

Common Situations Business Insurance May Cover for a Mortgage Brokerage Business

Example 1: During a meeting with a potential client in your office, they trip over a box left in the hallway. General liability insurance would cover the client’s medical bills and your legal fees in the event of a lawsuit.

Example 2: Your business launches a new website, featuring a photo protected under copyright law. The image’s owner sues for copyright infringement. General liability insurance would cover your legal fees and any payouts associated with this lawsuit.

Example 3: During a meeting in your office, a client sets her expensive purse on the counter directly under a roof leak. The leaking water destroys the purse and she seeks reparation. General liability insurance would cover the cost of replacing the damaged purse.

Other Types of Coverage Mortgage Brokerage Businesses Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all mortgage brokerages should obtain.

Commercial Auto Insurance

Since you will be driving your business vehicle on public roadways, you are mandated by the state to carry a commercial auto policy. Auto insurance protects not only your vehicle but any liability you may have in an accident. Your personal car insurance will not cover you if you are driving the business vehicle, even if you are off duty.

Commercial Property Insurance

If you own your location instead of renting, you need commercial property insurance to protect the building. If your business is based out of your home, your homeowners’ insurance will not cover the home when it is being used for commercial purposes. Property insurance also covers items owned by your business.

Mortgage brokerage businesses invest heavily in the computer systems that are used to carry out their work. Be sure that you have enough coverage to replace all of your hardware and software in case of loss. This coverage is generally offered in a Business Owner Policy (BOP).

In addition to the policies outlined above, there are a few other types of coverage your mortgage brokerage business may require depending on certain aspects of your operations. Some of these might not apply to you, so be sure to ask your agent which policies are right for your business.

Workers’ Compensation Insurance

If your mortgage brokerage business has any employees (full-time or part-time), you are legally required to carry workers’ compensation insurance. This type of coverage will help compensate your employees in the case that they get injured on the job.

Read more about workers’ compensation insurance.

Business Interruption Insurance

In the event of a fire, flood, or other catastrophes, there is a good chance your business operations will be halted for some time. Business interruption coverage is designed to help you recoup a portion of the revenue your business would lose due to the inability to operate.

This type of insurance is typically included in a business owner’s policy.

Commercial Umbrella Insurance

Umbrella coverage allows you to extend above and beyond the standard limits of your other business insurance policies. If you are faced with a large lawsuit or other claim situation, there’s a possibility that the coverage limits of your standard policies will be insufficient. In this case, your umbrella policy will allow you to surpass these limits.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

Getting a mortgage agency up and running can be done at very little cost, especially if you intend to operate from home. Equipment required would be mainly computer software and hardware. Recurring costs would be utilities, travel expenses, and salaries.   

Visit our How to Start a Mortgage Brokerage guide to learn more about the costs of starting and maintaining this business.

Small mortgage brokerage businesses have minimal ongoing expenses, including office space and labor. Larger businesses have the same basic costs, but they usually are higher.

Learn more about running a mortgage brokerage.

Mortgage brokers receive a commission, amounting to a percentage of each loan, for bringing customers and lenders together.

Learn more about starting a mortgage brokerage.

Mortgage brokers act as a middleman between borrowers and lenders and can often negotiate deals that otherwise wouldn’t be reached.

Profit margins for a mortgage brokerage business can range from 10% to 50% or more, depending on the size of the business. 

Learn more about starting a mortgage brokerage.