Should I Start an LLC for My Real Estate Brokerage
Starting a limited liability company (LLC) for your real estate 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 real estate brokerage, lawsuits can arise from things like defaulting on a loan used to startup your business, poor advice that resulted in loss for the client, and property damage while showing a potential buyer a property.
LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your real estate brokerage seem more credible.
Interested in getting started? More than 84% of our readers form their LLC through a specialized LLC formation service in order to save time and avoid potential penalties.
Tailor Brands ($0 + State Fees)
What is a Real Estate Broker and What Do Brokers Do?
A real estate broker is a real estate licensed professional that manages the daily business operations of a brokerage firm. These real estate experts can work independently or through a brokerage firm to sell properties. Their responsibilities include lawfully managing real estate transactions, properly completing necessary documents, and providing accurate reports of funds in escrow.
If you’re ready to become a licensed real estate professional with the goal of becoming a broker, learn more about how to easily become a licensed real estate agent here.
Do I Need an LLC as a Real Estate Broker?
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 Real Estate Brokerage
By starting an LLC for your real estate 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.
Real estate brokerages will benefit from liability protection because errors on real estate documents, breach of contract, and a host of other things can lead to legal trouble for realtors and real estate firms.
Example 1: You take out a loan to expand your real estate brokerage. You later default on the loan, and the lender files a lawsuit against you. As long as you did not personally guarantee the loan, LLC will protect your private assets if your business ends up going bankrupt in the process of paying back the loan.
Example 2: A client sues your brokerage for negligent advice during a property transaction. If the lawsuit is ruled in your client’s favor, liability protection will ensure that only your business assets are affected and that your personal finances remain safe.
Example 3: You have an employee who accidentally damages a property while showing it to a potential buyer. The owner files a compensation lawsuit, claiming negligence on behalf of your agency. With liability protection in place, your personal assets will be protected from the lawsuit.
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 Real Estate 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 real estate 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
Real estate 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 loans, grants, and credit.
As you start or continue to grow your real estate business, we recommend getting a subscription to foreclosure.com, where you can find great deals on local, and low-cost (distressed, tax liens, etc.) investment properties. The database updates twice a day, so you can quickly secure your next real estate deal.
Launch Your LLC With Tailor Brands
More than 84% of our readers form their LLC through a specialized LLC formation service like Tailor Brands in order to save time and avoid potential penalties.
How to Form an LLC
Forming an LLC is easy. There are two options for forming your LLC:
- You can hire a professional LLC formation service to set up your LLC for a small fee
- Or, you can choose your state from the list below to start an LLC yourself
Select Your State
- Alabama LLC
- Alaska LLC
- Arizona LLC
- Arkansas LLC
- California LLC
- Colorado LLC
- Connecticut LLC
- Delaware LLC
- Florida LLC
- Georgia LLC
- Hawaii LLC
- Idaho LLC
- Illinois LLC
- Indiana LLC
- Iowa LLC
- Kansas LLC
- Kentucky LLC
- Louisiana LLC
- Maine LLC
- Maryland LLC
- Massachusetts LLC
- Michigan LLC
- Minnesota LLC
- Mississippi LLC
- Missouri LLC
- Montana LLC
- Nebraska LLC
- Nevada LLC
- New Hampshire LLC
- New Jersey LLC
- New Mexico LLC
- New York LLC
- North Carolina LLC
- North Dakota LLC
- Ohio LLC
- Oklahoma LLC
- Oregon LLC
- Pennsylvania LLC
- Rhode Island LLC
- South Carolina LLC
- South Dakota LLC
- Tennessee LLC
- Texas LLC
- Utah LLC
- Vermont LLC
- Virginia LLC
- Washington LLC
- Washington D.C. LLC
- West Virginia LLC
- Wisconsin LLC
- Wyoming LLC
For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.
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.
Real estate brokerages need insurance to protect against potential risks they may face while operating. These risks include damage to property, theft of assets, and liability related to employee activities or recommendations. Insurance helps these brokerages manage financial losses in the event of an accident or lawsuit by providing coverage in the form of compensation or legal expenses.
Common Situations Business Insurance May Cover for a Real Estate Brokerage
Example 1: During an open house event you host in a home with an extensive collection of antiques, you accidentally knock an expensive figurine off a shelf and it breaks. General liability insurance would cover the replacement cost of the figurine.
Example 2: While you show a potential buyer around a house, he slips on a cord you failed to cover, breaks an arm, and decides to sue. General liability insurance would cover the potential buyer’s medical bills, your legal fees, and any damages awarded by a court.
Example 3: While conducting a walkthrough of a home after a showing, you fail to turn off the bathroom fan. After you leave, the fan motor overheats and ignites a fire that damages half the home. General liability insurance would cover the cost to repair or replace the damaged home.
Example 4: You want to partner with a large franchise company that requires evidence of general liability insurance. Having this coverage would help fulfill your eligibility requirements.
Other Types of Coverage Real Estate Brokerages 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 real estate companies should obtain:
Professional Liability Insurance
Because most real estate transactions involve large sums of money, professional liability insurance is essential. This coverage, also known as “errors and omissions” insurance, protects you when a client sues because they are unhappy with their transaction, claiming your professional advice and representation is at fault.
Commercial Auto Insurance
If you use a personal car for business activities, your personal auto policy may not cover losses from a work-related accident. State law mandates minimum levels of commercial auto coverage to protect both you and others on the road in the event of an accident. While each state requires a certain level of insurance for vehicles on public roads, the minimum requirement only offers basic protection. As such, consider purchasing limits greater than those required by state law.
You can purchase commercial auto insurance as a standalone policy or as part of a business owners’ policy (BOP).
Commercial Property Insurance
As a real estate agent, you know how expensive it can be to repair or replace a damaged building. If you own the building in which you operate, you need commercial property insurance to cover your building and the business property stored there in the event of a fire, burglary, or natural disaster.
You can typically purchase this coverage as part of a business owner’s policy (BOP).
Commercial Umbrella Insurance
For many of your clients, real estate transactions are expensive and emotional. As a result, you face greater liability exposure than other businesses. While your general liability policy covers most claims, some lawsuits may be so expensive that they threaten to exhaust the limits of your primary coverage. Commercial umbrella insurance protects you from paying out-of-pocket for legal fees and awarded damages that exceed your primary policy.
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.
At a minimum, you’ll need general liability insurance and professional liability insurance.
Read our Small Business Insurance article for more info.
To start a real estate brokerage business, you’ll need to budget for office space, a business license, insurance, marketing campaigns, utilities, and employee expenses. You’ll also need to set aside about $50,000 to cover expenses during your first year of business as it can take a while before you close your first deal.
Visit our How to Start a Real Estate Brokerage guide to learn more about the costs of starting and maintaining this business.
Operating expenses for a real estate business include rent, marketing, staff expenses (including commission shares on sales), utilities, and insurance.
Learn more about running a real estate brokerage.
A real estate business primarily makes money by earning commissions on property sales.
Learn more about starting a real estate brokerage.
Real estate businesses coordinate large financial and legal transactions between buyers and sellers of real property.
The average profit margin for a real estate professional is at least 3%. A firm that participates in $10 million in transactions annually will see a gross profit of about $300,000.
Learn more about starting a real estate brokerage.