Legal Structure Options For Your Brokerage

Establishing a brokerage is a big moment in the career of a real estate professional. While every echelon of the industry is valid and plays its role, establishing a brokerage means that you have passed through the ringer multiple times and have come through with a lot of experience and education, to the point where you can establish your own business and offer the services of multiple types of real estate professionals.

You not only offer more services and, hopefully, attract more and higher-volume clients, but you also have the opportunity to build a team, a brand, and a culture to which you can attach your name and your professional hopes and dreams. It is not all so rosy, however; legal logistics play a big part in what your career will look like from here on out.

There are many differences between the different types of brokerages you can establish in legal terms, and the scope of these differences runs the gamut between the way the businesses are taxed to the way that liability is assumed. The most significant differences will be examined in overview here.

Partnership

In a partnership, each partner shares directly in the gains and losses of the business, Based on their percent share. They also assume personal liability for their own actions and the debts of their partnership, as well as the actions of other partners and whatever effect these may have on the partnership itself.

LLC

An LLC, or limited liability corporation, as the name implies, is specifically organized to protect the individual members from any personal liability, except in certain specific and limited cases. As a general rule, as long as there is a reasonable separation between the interests and affairs of the corporation and the personal affairs of the individual, the individual is only liable for business debts to the extent of their personal involvement or contribution.

In other words, only what you put into the business financially is at risk; you are not liable for others’ financial or activity contributions. As with partnerships, the profits and losses of the corporation are distributed directly to the owners; there is no stock.

LLCs are often the best choice for most small businesses, including new brokerages, because they are flexible in terms of taxes and limit liability in the manner of a corporation without the bureaucracy that typically accompanies this arrangement.

However, it is more difficult to go public from an LLC framework, so it all depends on the long-term goals of your business.

Sole proprietorship

The main difference with a sole proprietorship is taxation. Under this organizational structure, you will be taxed as a self-employed individual, and the income of your business will be considered your personal income for tax purposes.

C corp

All corporations begin as C corps, but may choose to file as S corps in any given tax year by filing to convert their status. C corps have flexibility in shareholding that other corporations do not: they can sell more shares and categories of stock, and can be owned by another corporation. Each of these provisions allows for the growth of the corporation.

S corp

The company may want to file as an S corp to save on taxes. For this reason, it is often preferable for small businesses. However, your business may start small but you may have ambitions of growing larger. This is something to consider when deciding which structure to use.