Recently, in San Diego, California, an unhappy homeowner sued their realtor when they discovered a similar house down the street had sold for a substantially smaller sum. This highlights some of the ongoing challenges today’s real estate agents and brokers are facing.
Many real estate professionals feel that the fact they carry E & O (errors and ommissions) insurance will protect them in the case of a lawsuit. Unfortunately, there are two difficulties with E & O insurance. The first is it ONLY covers errors and ommissions! So if the lawsuit does not fall in these two areas, the agent is not covered. Secondly, most E & O insurance is capped and will not cover a larger suit.
As an alternative, many real estate agents are looking newly into setting up corporations or LLCs to protect their businesses. The use of these entities create the corporate veil, which effectively shields the real estate agent from having their personal assets threatened by a business lawsuit. This is especially crucial in community property states, like California or Nevada. In these states, if the real estate agent is sued, the litigant can not only go after the agent but also their spouse. In some states, up to 25% of the spouses wages can be garnished for a 10 year period to meet the lawsuit. Through the use of a corporation or LLC, the damages would be limited only to whatever income is being held in the corporation or LLC, rather than allowing the litigant to tap into the agent’s personal assets.
In addition, there can be significant self-employment tax savings for the individual agent if he or she is netting over $60,000/a year in 1099 income. For an agent, netting $100,000 a year, this can put an additional $7,0000 to $10,000 into the agent’s pocket for their use, instead of handing it over to the IRS!
Warning !!! Every state has different requirements for the incorporation of real estate agents and brokers. Take time to educate yourself by calling the Real Estate Division in your state to find out the regulations before you set up your corporation or LLC. For example, in California, only S or C corporations can be filed and they can be called any name that the agent would like, depending on availability. One state over in Nevada, a real estate agent needs to set up either an LLC or a Professional Corporation, with the name used on their license. Arizona has different laws, as well.
In the real estate classes that we teach in Nevada, turkey real estate citizenship over 50% of the agents who are incorporated have set up their corporations incorrectly (including those using an attorney or CPA!) In a recent class we taught at the Greater Las Vegas Association of Realtors, we found one of our students had spent over $2,000 with a real estate attorney, recommended by her broker and her corporation was set up incorrectly. They then need to reincorporate to be in compliance with the Nevada Real Estate Division.
Once your corporation or LLC is formed, in many states, you can place your licenses within the entity, allowing you the corporate protection so crucial in today’s market.
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