NASE Blogs

From the Trenches ... Can a Licensed Professional form a Legal Entity?

Wednesday, August 25, 2010

Q.        I have my real estate license and am being told that I have to use my own name as a sole proprietor and can not form a Corporation. Is this correct?


A.        Every state has different rules so you should ultimately check with your state real estate licensing board for the specifics of your state. However, real estate agents ... and other licensed professionals such as insurance agents ... commonly operate under a Corporation.


The confusion generally occurs because state laws require commissions for some licensed professionals to be ... paid in the name of the license holder. Because your license is in your name as an individual it means commission checks must be made payable to you as an individual.


The way you work around this is to assign your income to the Corporation. If you operate as a Corporation and your state does not have any restrictions for you doing so, after you form the entity you establish a bank account in the name of the Corporation and deposit all commission checks into that account. You would also need to include in your Corporate Bylaws and minutes a statement that as an individual you are assigning all income from the real estate business activity to the Corporation.


At the end of the year, because you would get a 1099 in your individual name for the commissions received, you would complete a Schedule C that shows the income from the 1099 and then also as an expense of assigned income, which would mean the Schedule C would have a net profit of 0. You would also include a notation with your return that the revenue was assigned and reported under a Corporation. This is a simple process but best handled by a tax pro until you understand the process if you do your own taxes.


If you go on to get your broker’s license, there is generally no issue in your ability to set the brokerage up under the name of a Corporation.


The most important consideration for you in making your choice for which legal and tax entity to choose is to give it careful review and if you don’t have the expertise to crunch the numbers ... get the assistance of a good tax professional who can guide you through the decision making process.


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