Do you own a business…or do you just own a job? I will give you a hint, if your commission checks still have your personal name on them, you most likely own a job.
[This would be a good time to add a legal disclaimer about this post: I am not an attorney, accountant, or tax consultant. This article is not meant to give advice in any capacity and is strictly for educational and entertainment purposes.] Phew! Now that we got that part out of the way, back to the post…
See, too many of us real estate professionals out there are under the illusion we own a business, when in reality, we just own a very high paying (hopefully) job.
Recently, I had the pleasure of sitting in on Bob Kilinski’s Master Business Agent Program: Running Your Business Like a Business. Bob is a partner is the South East Region of Keller Williams Real Estate, and has been teaching agents how to turn their real estate practice into a real estate business for a long time. The class was definitely eye-opening for me, and my guess is, for most of the top agents in attendance as well. I am going to give you a breakdown of the ten business identifiers check list Bob gave us at the beginning of the class. For today’s post, we are going to focus on the first one in the list, which is “Are you incorporated?” Here is a brief overview of the list:
- Are you incorporated?
- Are you capitalized?
- Do you have separate business checking accounts?
- Do you have a budget?
- Do you have a P&L and balance sheet?
- Do you have a business plan?
- Do you have systems in place? (According to the Millionaire Real Estate Agent)
- Do you have employees or associates working with you?
- Do you have a board of directors?
- Can the business fire you (for non-performance)?
So now that you have seen the list, and it starts by asking “Are you incorporated?,” you may have a better understanding as to why I opened this post with the hint about what name appears on your commission check. You see, being incorporated serves a multitude of purposes. We will cover some of the main benefits, and as always, each person’s situation and needs may be different, so speak with your accountant or tax professional to get the best advice for your particular needs.
There are a great number of real estate agents out there that may not know they are even eligible to incorporate. I have heard that some brokerages frown against it as well. If that is the case in your current situation, you should probably begin looking for a brokerage that understands the needs of an agent better. Let’s assume you are not currently incorporated. The best question to ask then is “Why would I want to incur the cost and headache of incorporating?”
That is the question we will be answering in the rest of this post. In fact, I am going to go through my top 3 reasons as to why an agent would want to incorporate their business:
Personal Liability Protection
If something goes wrong in a transaction, you may be sued personally. Sure you have errors and omissions insurance, but, depending on the circumstances, it may not be enough. Having your business as its own entity may prevent you from putting the rest of your assets at risk…like the equity in your home! Oh, and I am sure you are not one of those agents that still puts clients in your personal vehicle, or a vehicle that is in your personal name while showing properties, right? You may want to look into your liability if you are, and you may want to read the small print in your brokerage contract to make sure you have the company listed as an additional insured, if they demand it.
Branding
This one may cause some arguments, or at least some heated debates. It really also depends on what your long-term plan for your business is, including your exit strategy. You do have an exit strategy, correct? Tell me at least you have a long-term plan? Ok, how about something scratched on the back of napkin after a few shots of tequila at last week’s happy hour that looks like a plan?
I digress.
There is a school of thought in real estate today that is forward thinking. While some agents are thinking if they should start a team, other teams are thinking what state or country they should expand into next. Having your business as a separate entity takes the “you” out of the equation and allows for the building of something bigger. Much bigger. Now, that’s not to say you can’t build a brand around your name (Trump, anyone?), but again, it comes back to your exit strategy and your long-term plans. If you decide you want to sell your business in the future, or partner up an up and coming agent as you get closer to retiring, what do you think will be an easier transition for your clients- Joe Smith real estate without Joe Smith, or (enter fictitious name here, like Equity One Real Estate) without Joe Smith? Note, some states have some strict laws as far as advertising fictitious names for real estate agents, so check with your broker on what’s acceptable in your area.
Potential Tax Savings
Depending on your situation, and the entity you choose, you may be able to save on taxes as well. All independent contractors pay a self employment tax. By setting up a corporation, you may be able to take a paycheck from the company, as a W2 employee, and then pay yourself dividends each quarter that may not be subject to the self employment taxes. Again, I am simplifying the strategy for the sake of this post, and you will want to speak to a professional tax consultant as to the best way to set this up for your own needs.
I plan on digging into the other items on Bob’s checklist in future posts, so that we can understand how to truly build a business. I do want to state that while these posts are a good recap of the information, we will barely be scratching the surface of what Bob has taught through the course. If you have the opportunity to take one of Bob Kilinski’s classes, I highly recommend it.
Until next time…