Many of us may remember in Shakespeare's Hamlet when Hamlet is reflecting on killing his King / Uncle for the supposed murder of the previous King (Hamlet's father).
To be, or not to be: that is the question:
Whether ‘tis nobler in the mind to suffer
The slings and arrows of outrageous fortune,
Or to take arms against a sea of troubles, And by opposing end them?
The same can be said about incorporating your own real estate business, albeit being an investor or a Realtor. Should you take the next step and become a company, or should you remain as an individual? By incorporating you can survive “the slings and arrows [on your way toward] fortune" or you do not and then face a possible “sea of troubles".
The first thing you have to do is weigh the costs of creating a company versus the supposed savings for not incorporating.
When dealing with setting up a business you have look at what types of entities are available for your business. There are essentially 6 different types of entities. Each has its own advantages or disadvantages. All of these entities, except for partnerships, can be formed by just one individual.
C-Corporations: This type of entity is a separate breathing entity with a life of its own. It files its own tax returns and gives a lot of legal protection.
S-Corporations: This has the same advantages of a C-Corp with the exception that this is a pass-through income stream. Instead of the money staying in the corporation itself, any profit will be distributed to the shareholders. Both corporations are perfect for businesses who offer a service.
Limited Liability Company: This is the newest kid on the block. Legal precedence is still being created for this type of entity. There are many advantages to this entity as the company is only liable for the amount of money that was initially put into it. The income is also pass-through to its members (like a shareholder in a corporation). This type of entity is usually better for businesses that hold tangible assets.
Limited Partnership: This entity is for two or people or businesses that come together to run a business jointly. There are many advantages to this entity but I would not recommend for an individual Realtor.
General Partnership: This entity is probably the most dangerous one out there. In a general partnership all partners are and will be held liable for any action of any partner inside and outside of the company. If one partner messes up and has an accident then all partners could be held financially responsible for it. If you want to form a partnership then go the entire way and make it a Limited Partnership.
Sole Proprietor: This entity is the default entity by the IRS tax code for anyone doing business if they don't take the legal steps to formally incorporate. As a sole proprietor you are personally responsible for anything you or your business does, and vice versa. You get the fewest tax write-offs and have the most legal liability. Most people tend to stay in this category. Realtors, home business operators, and network marketing representatives all usually fall into this category.
Why should I, as a Realtor, incorporate?
Let me start my asking how many of you Realtors keep track of your mileage when you are out showing clients (and actually have your accountant claim it on your taxes)? How many of you who take your client out for coffee or lunch and you keep the receipt for a tax write-off? How many of you keep the receipt for the bottles of water you keep in your car that you give your clients to drink? Or, the costs for your business cards or advertising? If the question is no to at least one of these questions then you need to seriously ask yourself “am I running a real business?"
Thus, with simply the mileage credit (or auto credit if you decide to go that route) you can pay off the costs of incorporating quickly.
Other Advantages of Incorporating
How would you like to be able to receive an additional $50,000 line of credit within 6 months or so? Could this help your business by being able to advertise more or even make your business more professional?
With the creation of a business you can now start building business credit. This is the new hot thing due to so many people having poor personal credit these days. In most cases, when building your business credit correctly, there are no personal guarantees. Thus, your personal life will have no affect on your business.
How do I build business credit?
In building corporate credit you start off slowly by getting small lines of credit with some national companies which report to the business credit agencies like Business Experian or Dunn and Bradstreet. Once you make some small purchases (usually $60 or more) and pay these bills on time then you start building a credit score. This is much like being a teenager all over again and getting your first credit card. Once you show you can pay on time, you will apply and get other credit lines through other companies with larger and larger lines of credit.
Initially, your lines of credit will only be $500 to $1,000, but remember this is a long-term development. No 18 year old is given a Platinum Card without some credit history. Thus, within a few months you will be able to get that Visa or MasterCard account with a $5,000 or $10,000 credit line. As you use these cards, you are building a stronger and stronger credit profile (imagine now you are a 25 year old from a credit perspective). As your business credit score increases and it shows you pay on time then your company is seen as a safer risk and thus higher lines of credit.
What will I buy from these companies which I have credit?
First off, you should look at what you need for not only your business but also for your home office or even your household. If you can go to your local grocer and pay $15 for trash bags, as an example, would you be willing to pay $16 online in order to increase your credit profile knowing this could lead to tens of thousands of dollars? What if buying from your online account is actually cheaper?
The question was stated if you as a Realtor should incorporate your real estate business. Being a Realtor you have a lot of liability even if it is simply driving your car between different homes. The tax advantages can save you thousands every year. This would be from car usage, cell phone, fax line, website, or even paper and toner. The addition of other tax advantages from health insurance (paid by your corporation in pre-tax dollars) can be huge. Then there is the additional benefit of building a separate you (as your business) and creating a brand new credit profile regardless if yours is spotless or so dirty that it is contagious. Now it is up to you to incorporate and save money and remove many legal liabilities OR stay a sole proprietor and gamble every day as to what life may bring. To Incorporate, or Not to Incorporate is indeed the question.
Kevin Dunlap works for Trident Investments Group ( http://www.tridentinvestmentsllc.com) which is a full circle real estate investment company specializing in various areas of real estate investing from lease options to credit repair and has affiliates who have been helping agents create legal business entities and corporate credit profiles for years. Call Kevin at (702) 516-5698 or Email us at email@example.com for more details. Kevin is a real estate investor for 8 years with specialties in lease options, creative investing, apartment complexes, and buying outside your region of residence. He has operated over 4 investment companies over this time and is currently residing in Las Vegas, NV.