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Does Forming an LLC Reduce My Taxes?

Q:  As a real estate agent for residential property, should I form an LLC to reduce my taxes?

A:  The easiest and quickest answer to your question is simply NO! The first key point to consider is that the form of entity under which you choose to operate will not have a material impact on your overall income tax liability. This is particularly true for the small business owner providing personal services such as residential real estate agent where all of your income is considered earned income. In fact, the sole proprietor who forms an LLC for their business activity could choose to file the income of expenses related to that business using IRS Schedule C, Profit or Loss from Business. This is the exact same form that the exact same sole proprietor would use if they hadn’t formed the LLC. In this case, the taxes would be exactly the same.

There are certainly benefits and detriments of all forms of organization, however, expecting to pay lower taxes simple due to entity form should not be considered. An LLC, or Limited Liability Company, can provide some protection for your personal assets from potential liabilities generated by the business which can be a good reason for choosing that form of organization. Liability protection can also be considered a benefit of forming a corporation or operating your LLC as an S Corporation. Forming an LLC or corporation can also provide an easier opportunity for adding an investor or additional owner and perhaps facilitate an exit strategy that is more convenient when it is time to sell your business. However, the key point to your question is that the choice of entity form should not be a tax decision.

As always, don’t forget that you are not alone. Bookmark our website at NASE.org as well as the IRS website at IRS.gov you will always be able to find the help you need.