A Realtor has questions - we have answers

The IRS does not tax businesses according to the type of legal entity used. There is no difference between an LLC (Company) and a Corporation – from the IRS’s point of view. What the IRS cares about is the tax selection that made.

• A corporation can have 2 tax selections. Chapter “C” of the tax code or sub-chapter “S” of the tax code.
• A company can have 3 tax selections. Default (single or multi-member flow-through); chapter “C” of the tax code or sub-chapter “S” of the tax code.

In most states the costs of formation / on-going registration of a corporation or a company are the same. In those states where the costs are different, we recommend the less expensive. Unless you are planning on “going public”, issuing shares on the stock exchange, or having lots (several dozen) of employees, a corporation has more on-going paperwork than a company. How much more? About one third.

Case law to-date shows that the courts apply the law to an LLC the same way that a corporation of the same tax selection is treated.

Since there appear to be no significant legal differences between a company and a corporation (at least as far as small business owners are concerned), we recommend the simpler and less expensive entity with the appropriate tax selection for any given situation.

If, on the other hand, you want INC. as opposed to LLC at the end of your business name, then a corporation is the only way to go.

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Q. Doesn't all the income from a one-member LLC dump back to where it would be on a personal tax return - Schedule C with all the same self employment tax?

A. A single member LLC with the default tax selection does show up on your personal tax return to be taxed as active (self-employment + income tax) or passive (income tax only) depending on how the income is classified.

A company or a corporation with a sub-chapter “S” tax selection affords you the possibility of reducing your active income (and the resulting employment tax). The exact ratio of active income / passive distribution is something that your CPA would help you determine. Many times this reduction is as much as 50%. Your savings on this alone would be 15.3% on the amount treated as a distribution. In addition, your CPA should help you take advantage of the additional deductions that sub-chapter “S” provides to lower your taxable income even further.

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Q. Does the LLC relieve the licensee of liability or responsibility of the licensee for conduct or licensable activities as misconceived by many people?

A. As a Realtor® we are liable for our actions whether we are in an entity (company or corporation) or not. That’s what E&O insurance is for – unless you commit fraud or other illegal activity, in which case it doesn’t matter whether you’re an employee, owner or a professional. A corporation or a company does not provide shelter from the consequences of an illegal act. In addition, the regulatory body overseeing Realtors® at the state level also has compliance requirements e.g. Nevada requires that the agent’s name is used as the business name; California does not require the agent’s name to be used unless they are acting as a broker.

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As an entity formation provider, we charge the same fees whether the entity is a Partnership, Limited Liability Company or a Corporation, and whether the tax selection is defaulted or if chapter “C” or sub-chapter “S” tax treatment is chosen.

As an entity structuring provider, we provide information on the possibilities of using different combinations of entities and tax selection to achieve your wealth accumulation and liability reduction goals.

As an entity education provider, we encourage people to learn as much as possible about the consequences of their choices and how to “do the paperwork” to take advantage of their choices through our weekly and monthly teleseminar series and through reading, coaching and open discussions.

Got to go - mom says that I have an appointment - wonder what she means?

Smokey