Structuring Your Business | Chicago Association of REALTORS®

Starting a real estate business can be intimidating. Setting your business up for success starts by setting up your business. Here are some considerations to make before stepping off on your own.

Define Your Objectives

Why are you creating your own company instead of working for someone else? What will make your brokerage stand apart? Are you prepared to walk into a lawyer’s office and set up your company?

Chicago attorney Adam Wilde, Wilde Law Group, LLC, said having these ideas in mind is a great start.

“The first thing I would recommend is a clear objective of ownership,” Wilde said.

Wilde said a beginning broker should ask themselves if they’re looking to establish a sole ownership, develop into a team or have employees.

“A broker should also consider any assets they want to put into the business, start-up capital, insurance transfers, account transfers, vehicle registration transfers [and] lease assignability (if they have their own workspace or office),” he said.

Types of Brokerage

Decide if your brokerage structure goes hand-in-hand with your objective of ownership. Will your firm franchise or not franchise? According to the National Association of Realtors®, the vast majority of firms in the U.S. are independent and non-franchised.

NAR breaks down brokerage models into four common categories:

  • Traditional
  • Flat Fee
  • A La Carte
  • 100% Commission

The main differences between them are how commissions are handled and how employees are treated for tax implications. Traditional brokerages are the most common among REALTORS®, with nearly three-quarters splitting a commission between the agent and the brokerage, as of 2015. 100% Commission, a brokerage type where agents pay a monthly fee to the brokerage and keep the full commission, makes up 1 in 5 brokerages in the country, according to 2015 NAR data.

Traditional and 100% Commission brokerages typically treat agents as independent contractors, which affects a brokerage’s tax liability. Nearly 86 percent of REALTORS® affiliated with a firm are treated as independent contractors, according to 2017 NAR data. Laws vary by state on how agents are classified and what constitutes an independent contractor. In Illinois, beginning brokers should ensure they’re conforming to the requirements of the Real Estate License Act of 2000 and any other laws that apply, like the Fair Labor Standards Act.

Consider Tax Structure

Speaking of tax classification, your brokerage will have different tax liabilities depending on its structure. Some common business organizations include limited liability companies (LLCs), corporations and S corporations.

Wilde recommends that REALTORS® consider setting up their business as a single-member LLC.

“If you’re set up as an LLC, you have the option of electing to be treated as an S Corporation for Federal tax purposes,” Wilde said. “If you do not elect this option, the default for a single-member LLC is to report your taxes as a sole proprietor on Schedule C of your personal tax return. Both structures serve as pass-through income when considering the new tax laws enacted under the Tax Cuts and Jobs Act.”

So, what is a “pass-through?” For qualifying businesses, a corporate tax is not levied on its own. Instead, the profits a company earns “pass-through to individual owners, and they are taxed for those profits as their own individual income,” according to a December 2017 PBS report.

Passed in late 2017, the Tax Cuts and Jobs Act lowered tax rates and extended some new deductions for small business owners.

REALTORS® should seek individual advice to properly project their tax liabilities under the new tax law, but there are general implications under the new law for brokerages, including in pass-throughs.

“Congress dropped the C Corporation tax rates from 35 [percent] to 21 [percent] so corporations will see much higher tax savings,” Wilde said. “However, double taxation stills exists [where] the corporation pays taxes on its taxable income as well as the income taken by the shareholders.”

“In order to keep a level playing field between corporations and pass-through entities, Congress implemented a new Qualified Business Income Deduction (QBID) under Section 199A of the Internal Revenue Code. This gives certain pass-through entities a 20 [percent] deduction based on net taxable income from business operations.”

Although Tax Day was a few months ago, it’s important to keep in mind that the 2017 filing wasn’t affected by the new tax bill. All REALTORS® should meet with their tax specialist early to ensure they are compliant and taking full advantage of the changes.

It is important for new brokerage owners to consult with your own attorneys and financial/tax professionals to determine the best fit for your business.