Owning your own business - Part 2

Corporation

(Closed Corporation, owned by one person or a small group of people, as opposed to a Public or Open Corporation)

As a real estate sales licensee, or broker, you OWN your own business.

What business form have you chosen and why?

Often new licensees are attracted to the conversation and allure of the supposed tax advantages of some forms of ownership, before the new licensee is in a position to form an entity, separate from themselves.

What are the advantages and disadvantages of operating your business as a:

• Sole Proprietorship
• Corporation (C Corp)
• Corporation (Sub Chapter S)
• Limited Liability Company (LLC)

(I will examine all of the above in separate posts).

Corporations

The Corporation as a form of business was created to provide stability, continuity, flexibility to plan for the future operation of the business, and to allow for a "perpetual existence," which is extremely helpful when it comes to business continuity.

Unlike sole proprietorships and partnerships, a Corporation is a "legal person," separate and apart from its shareholders (owners).

This is of critical importance as the assets of the owners of the corporation are not liable for the debts of the corporation. Corporations provide liability protection for the owners. If a corporation goes bankrupt, the other assets of the shareholders are not affected.

A corporation may have one or many owners and issues shares of stock, which are evidence of ownership (just as a deed is evidence of ownership of a piece of real estate).

This is important as it makes transfers of ownership interests easier and defines the number of ownership interests. Ownership is transferred by signing over and issuing new stock certificates.

Corporations have their own Tax ID number, and they are required to file a separate tax return on IRS Form 1120.

Corporations pay income tax on profits. Shareholders pay income tax on any dividend received from the corporation after profits and taxes. Thus, corporations are said to be "double taxed," and indeed they are.

Advantages of the Corporation as a Business Entity

• Limited Liability for Shareholders
• Perpetual Existence
• Ownership interests (represented by stock certificates), are easily transferred
• Easier to grow the business, allowing for business continuity
• Certain tax benefits for retirement plans and healthcare expenses.
•  

Disadvantages

• Double Taxation - Taxation both at the corporate level and at the shareholder level
• Must file a separate tax return (Form 1120)
• There are added expenses to maintain a corporation
• Must maintain proper "corporate housekeeping" to maintain the "Corporate Veil “and maintain liability protection. Often, corporate housekeeping is ignored by new businesses.

Conclusion

Before you decide to set up a corporation for your real estate business, it is a good idea to consult with a CPA or a Certified Financial Planner about your business and personal goals and objectives. If you are not going to be able to take advantage of the benefits a corporate form brings, do not spend the money or time setting up a corporation as there is the set up costs, as well as the ongoing costs to maintain.

Also check with your licensing entity to make sure that the type of entity you establish is permitted by law to receive real estate commissions.

Subchapter S Election

Corporations can elect (Under "Subchapter S") to allow the tax the tax benefits or deductions to flow through to the shareholders, as a "Pass Through," to avoid the double taxation aspect of a corporation, as opposed to being taxed at the corporate and at the individual levels. Also keep in mind that there are certain limitations once S corp status has been filed for by a corporation.

Owning your own business - Part 2

Corporation

(Closed Corporation, owned by one person or a small group of people, as opposed to a Public or Open Corporation)

As a real estate sales licensee, or broker, you OWN your own business.

What business form have you chosen and why?

Often new licensees are attracted to the conversation and allure of the supposed tax advantages of some forms of ownership, before the new licensee is in a position to form an entity, separate from themselves.

What are the advantages and disadvantages of operating your business as a:

Sole Proprietorship

Corporation (C Corp)

Corporation (Sub Chapter S)

Limited Liability Company

(I will examine all of the above in separate posts).

Corporations

The Corporation as a form of business was created to provide stability, continuity, flexibility to plan for the future operation of the business, and to allow for a "perpetual existence," which is extremely helpful when it comes to business continuity.

Unlike sole proprietorships and partnerships, a Corporation is a "legal person," separate and apart from its shareholders (owners).

This is of critical importance as the assets of the owners of the corporation are not liable for the debts of the corporation. Corporations provide liability protection for the owners. If a corporation goes bankrupt, the other assets of the shareholders are not affected.

A corporation may have one or many owners and issues shares of stock, which are evidence of ownership (just as a deed is evidence of ownership of a piece of real estate).

This is important as it makes transfers of ownership interests easier and defines the number of ownership interests. Ownership is transferred by signing over and issuing new stock certificates.

Corporations have their own Tax ID number, and they are required to file a separate tax return on IRS Form 1120.

Corporations pay income tax on profits. Shareholders pay income tax on any dividend received from the corporation after profits and taxes. Thus, corporations are said to be "double taxed," and indeed they are.

Advantages of the Corporation as a Business Entity

Limited Liability for Shareholders

Perpetual Existence

Ownership interests (represented by stock certificates), are easily transferred

Easier to grow the business, allowing for business continuity

Certain tax benefits for retirement plans and healthcare expenses.

Disadvantages

Double Taxation - Taxation both at the corporate level and at the shareholder level

Must file a separate tax return (Form 1120)

There are added expenses to maintain a corporation

Must maintain proper "corporate housekeeping" to maintain the "Corporate Veil “and maintain liability protection. Often, corporate housekeeping is ignored by new businesses.

Conclusion

Before you decide to set up a corporation for your real estate business, it is a good idea to consult with a CPA or a Certified Financial Planner about your business and personal goals and objectives. If you are not going to be able to take advantage of the benefits a corporate form brings, do not spend the money or time setting up a corporation as there is the set up costs, as well as the ongoing costs to maintain.

Also check with your licensing entity to make sure that the type of entity you establish is permitted by law to receive real estate commissions.

Subchapter S Election

Corporations can elect (Under "Subchapter S") to allow the tax the tax benefits or deductions to flow through to the shareholders, as a "Pass Through," to avoid the double taxation aspect of a corporation, as opposed to being taxed at the corporate and at the individual levels. Also keep in mind that there are certain limitations once S corp status has been filed for by a corporation.