Alisha Pennington is a visionary with a knack for solving problems and empowering others. She leverages her decade of CEO experience to support others with starting and scaling businesses. Maurice Pennington is an integrator with a tech background and a meticulous nature, and he excels at developing strategies and systems for sustainability and profitability; he also loves to help others start and scale businesses. Together, at their consulting firm Pennington Perspective, the entrepreneurial couple is committed to showing their clients what is possible, when they use intentional business strategies. The two of them work with a similar mindset.
Real Estate Today thoroughly interviewed Alisha and Maurice Pennington on this topic and they explained their expertise by expressing that they “frequently work with self-employed individuals and often have discussions about whether they should form an LLC”. They also explain that “In [their] decade of doing business, [they] have personally dealt with Real Estate agents in 10 transactions”. They also go on to say that they have “numerous friends in the industry and a passion for Real Estate [themselves]”, and “each time [they] broach the topic of business formation with agents, [they] get varying responses”. There is, however, one consistent trend that the Pennington Perspective duo have identified, and that is that most agents don’t know enough to take action. “Real Estate agents are a prime demographic to take advantage of the opportunities available by forming a business” says Alisha, affirming to consider Pennington Perspective a resource to help agents determine what entity type would make the most sense for them.
Business Structure Options For Real Estate Professionals
Being that a Real Estate professional is self-employed, that means they are automatically eligible for business ownership. With that, one should consider the benefits of forming a limited liability company (LLC) or electing to be taxed as an S-corporation (S-corp). Both options can provide protection for personal assets and potentially offer tax benefits, but they also come with their own set of pros and cons. Let’s explore the benefits of starting an LLC and being taxed as an S-corp, and contrast those options with being self-employed as a Real Estate agent.
First, let’s figure out what these terms mean:
- An LLC is a type of business entity that combines elements of both a corporation and a partnership. LLCs offer the liability protection of a corporation, meaning that the personal assets of the owners (called “members”) are generally not at risk if the business incurs debt or faces legal action. LLCs also offer the flexibility of a partnership, allowing the members to choose how they want to be taxed and how the business is run. Keep in mind state requirements: some states may require real estate agents to register as a PLLC (professional llc) which offers the same protections.
- An S-corp is a type of corporation that elects to be taxed as a pass-through entity rather than a traditional corporation. This means that the S-corp itself does not pay income tax on its profits; instead, the profits and losses are passed through to the shareholders and reported on their personal tax returns. S-corp offers liability protection for the shareholders, similar to an LLC.
- A Self-Employed Real Estate agent is an individual who is not affiliated with a company or business entity, but rather operates as a Sole Proprietor. This means that the individual is responsible for all aspects of their business, including taxes, and their personal assets may be at risk if the business incurs debt or faces legal action.
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The Difference Between Each OptionNow that we’ve defined these terms let’s examine the differences between being a self-employed Real Estate agent and operating as an LLC. One of the main differences is that a self-employed individual is responsible for paying self-employment taxes, which include both the employee and employer portions of Social Security and Medicare taxes. These taxes are currently assessed at a rate of 15.3% on the first $137,700 of net income and 2.9% on any additional income. In addition to self-employment taxes, you will also be responsible for paying federal and state income taxes on your business income.
Another key difference between being self-employed and operating as an LLC is the availability of write-offs. As a self-employed individual, you can only deduct business expenses that are deemed “ordinary and necessary” for your business. This means that you can only write off expenses that are directly related to your Real Estate business and that are common and accepted in the industry. An LLC has more flexibility when it comes to write-offs. LLC members can write off a wider range of expenses, including certain home office expenses and health insurance premiums.
An LLC can choose to be taxed as an S-Corp, which means that the LLC itself is not subject to self-employment taxes. Instead, the income of the LLC is passed through to its members, who are then responsible for paying taxes on their share of the income.
If an LLC elects to be taxed as an S-Corp, additional write-offs and tax savings become available. As an S-Corp, you can choose to pay yourself a salary as an employee and distribute the remaining profits to yourself as dividends. This allows you to potentially lower your overall tax burden by taking advantage of the lower tax rates on dividends. S-Corporations are allowed to provide certain benefits to their employees, including health insurance and retirement plans. The costs of these benefits can be deducted as business expenses, providing additional savings for the LLC and its members.
We’ve provided a list of write-offs only available to LLCs taxed as S-Corps:
- Health insurance premiums for employees
- Retirement plan contributions for employees
- Certain home office expenses
- Business-related meals and entertainment expenses
- Travel expenses
- Certain vehicle expenses
- Business-related insurance premiums
- Business-related legal and professional fees
- Certain employee benefit plans
- Depreciation on business assets
- Interest on business-related debts
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Starting an LLC or being taxed as an S-corp can offer real estate professionals protection for their personal assets and potential tax benefits. Both options offer more flexibility and structure than being self-employed, but they also come with their own set of requirements and restrictions. It’s important to carefully consider your specific needs and goals as a real estate professional before deciding which option is right for you. If you work for a brokerage or are looking to work with one, be sure to discuss with the brokerage what options are available to you. As always, it is best to consult with a tax professional to determine your best course of action.
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Additional BenefitsAs one builds their brand online, setting up a business can provide numerous benefits for individuals looking to leverage brand deals. One of the main benefits is increased credibility. As a business structure, online recognition can help to establish your brand as a professional entity and make you more attractive to potential brand partners. In addition to increased credibility, setting up a business can also provide tax benefits, such as the ability to write off certain expenses related to creating the content for the brand deal. Finally, setting up a business can provide increased potential for growth as it creates a more sustainable and scalable model for your brand deals and partnerships.
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Social media has become a powerful tool for real estate agents looking to promote their businesses and reach potential clients. This necessary online presence can begin to blur the lines between where your business ends and your personal lifestyle begins. Starting an LLC can help bridge the two and create even more possibilities for you as you continue to build your brand and online presence.
If you’re looking to streamline your work-life balance, LLCs can be extremely helpful. Planning a vacation with your family? LLCs enable you to integrate work and vacation to benefit from a write off. In general terms, for domestic travel 50% of the trip must be dedicated to business (travel to and from counts). While for international travel 25% of the trip must be for business (travel to and from counts). As a Real Estate agent, opportunities are everywhere to tour homes, film content, or meet with other agents to discuss strategies. This illustrates how Real Estate agents utilizing LLCs can blur the line between business and personal lifestyle while at the same time benefiting monetarily.
Another additional benefit of starting an LLC is that a business owner with children is allowed to pay their children as employees if the children perform duties for the business. The amount that a business owner can pay their children will depend on a multitude of factors including the child’s age, the type of work they are performing, and the minimum wage laws in their state. From a tax strategy standpoint, the maximum deduction would be up to the standard ($13,850 for 2023). When considering these factors, it is important for business owners to research their state’s laws and consult with a tax professional to identify if this is a viable option.
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In SummaryReal Estate agents are a prime demographic of self-employed individuals who can greatly benefit from forming a business. We’ve seen firsthand how maximizing your business’s success can positively impact lives, especially for those who have already established themselves as self-employed individuals. We know that representing others to buy and/or sell real estate is a grind and every dollar is earned. We want you to keep as much of those earnings as possible. If you take nothing else from this article, let it be this: The tax code was not written to benefit individuals. It was written to benefit businesses. That is why Alisha and Maurice Pennington, founders of the forward-thinking and renowned consulting firm Pennington Perspective, want as many people to understand this and take full advantage of all of the opportunities possible through forming your own LLC.
