If you are a real estate agent working as an independent contractor for a Sacramento real estate brokerage, you may be generally aware of the advantages of forming a solely owned corporation for your real estate sales business. Perhaps your CPA even recommended that you organize your real estate sales business as an S corporation to take advantage of favorable tax treatment. While a CPA is in the best position to advise you on your specific tax matters, you can trust a California business formation lawyer to explain why it’s important for real estate agents to consider business formation.
Payment of Commissions
As a real estate agent licensed by California Bureau of Real Estate (BRE), you are probably aware that it is unlawful to provide real estate-related commissions to an unlicensed person or entity under the California Business and Professions Code. Your first concern with forming a corporation may be that you will run afoul of this prohibition, since your entity is not recognized by BRE and you hold your license as an individual. Lawmakers anticipated this conundrum and resolved it, so that you can instruct your broker to pay your commission to a third party – such as your corporation.
Advantageous Tax Treatment
Forming a corporation to obtain more favorable tax treatment is the primary goal of successful real estate agents. You should discuss the specifics with a CPA, since the tax laws are constantly changing. One particular provision that went into effect recently is the Real Estate Broker Section 199A Deduction, established as part of the Tax Cuts and Jobs Act. This deduction was created to offset qualified business income, which in turn alleviates the tax burden for owners of S corporations. Generally, the deduction will be equal to 20% of your business profit. If your S corporation makes $100,000 in commissions, you can take $20,000 as a deduction on your individual return as “passthrough.”
Protect Your Personal Assets
For general business purposes, many businesses opt to organize as a corporation to insulate the individual owners from the liabilities of the company. Once formed, the corporation is accountable for debts, judgments, and other legal and financial obligations of the business. For California real estate agents, you can safeguard your real estate sales business from actions by your administrative staff.
There are some exceptions in the areas of professional liability, personal guarantees, payroll tax matters, and fraudulent activity. All professionals, including real estate agents, are personally liable for their errors or omissions in the performance of their duties.
Consult with a Sacramento, CA Business Law Attorney About Your Goals
For more information on the benefits real estate agents can enjoy by forming a California corporation, Law Office of Kristina M. Reed in Sacramento. You can schedule a consultation regarding your business formation needs by calling 916-492-6033 or visiting us online.