CR Magazine – Autumn 2018

Structuring Your Business
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?
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.
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
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.”