Incorporate Yourself!



As real estate agents we are independent contractors, right? Right!  But that doesn’t mean we have to be a sole-proprietor.  In fact, I say you shouldn’t be a sole proprietor… you should incorporate.  It’s easy to do, and it’s inexpensive.   But why should you incorporate?  Why go to all the trouble?  I believe there are two very compelling reasons.

The first, and most important reason, is to save you money.  Lots of money.  Let me explain how it will save you money.  Let’s assume you’ll earn $100,000 this year practicing real estate.  As a self-employed person,  or a sole-proprietor like most agents, you will have to pay FICA tax on ever dime you earn, up to $106,800, of 12.4%.

On top of that you have to pay Medicare on every dime, without limit, of another 2.9%.  That is a total of 15.3% before you pay a dime of federal or state income tax!   Let’s not get too depressing, so let’s assume you are married filing jointly, and that you live in Florida.  (Don’t half the agents in the entire nation live in Florida?)  Anyway, I chose Florida because it one of only seven states that has no state income tax.  Being married and filing jointly puts your federal income tax rate at another 25%.  It would be 28% if you are single.

Add that together and you have a whopping 43.3% that goes to Uncle Sam!  In other words, you work the first 158 days of the year for the government, and you’re lucky because you have no state income tax!  Here in North Carolina, my state gets another 7%.  Think about it: that’s twenty-two and a half weeks just to pay your taxes!  Twenty-six if you lived in North Carolina.  Now let’s look at the same picture if you were incorporated.

Let’s say that your corporation employed you and paid you a salary at a typical agent income of $40,000 for the same year.  Now, because you are an employee, the corporation has to pay half of your FICA and medicare tax while you pay the other half.  Even counting both halfs, you save $9,180 just in FICA and medicare taxes alone.

Add to that the fact that your corporation can pay your legitimate business expenses, like mileage or vehicle costs, advertising, client meals, and so forth, out of pre-tax dollars.  Whatever money you don’t take as legitimate business expenses, you can take as corporate dividends and only pay income tax and not FICA and medicare.

And if your total taxable income (after all your allowable deductions) is under $68,000 then your tax rate is no greater than 15%!  That’s a savings in your income tax rate of another 10%!  But, your corporation could own your car, and make any payments if there are any. My company owns the car I drive, and my corporation owns a boat too.  After all, I must entertain clients sometimes, and I also need to show waterfront property using the company boat.

But there is another benefit: limited liability.  In today’s litigious society, that is a huge plus.  The corporation is a separate legal entity and if it owns no assets and it distributes its cash regularly, its potential loss in a lawsuit is minimal.  You can save a small fortune on liability insurance and E&O coverage.  Pretty sweet, eh?

So what is involved in incorporating?  Go to your Secretary of State’s website.   Often there is a corporation division.  Most of the time you can download “template” articles of incorporation right from their website.  Otherwise, Google it.  Fill in a few blanks, and send the state a check for around one hundred dollars, and you’re done.

Or you might use a service like The Company Corporation, LegalZoom.com, or Lawyers.com and fill in the blanks online.  It costs a little more, but you can have them get you all the “stuff” you’ll need, like your minute book, your corporate seal, your sample documents, and some will even apply for your Federal ID number for you.  Counting everything, you should be able to do it in a few hours and spend less than a few hundred dollars.

In most states you will have to get a “firm” license to practice as a corporation, but this practice is becoming common enough that you probably won’t have to be a broker or take a broker-in-charge course as long as you are only starting the company simply for tax reasons.

Certainly you will want to check with your state real estate commission to find out the particulars of practicing real estate as a corporation while staying affiliated right where you are now.  Every state is going to be different.  That having been said, I’m not aware of a single state that doesn’t make provision for agents who wish to practice real estate as a corporate entity.

So you spend a few hundred to save $20,000 a year in taxes?  I’d say that’s a pretty good investment.  That’s Max-Bang!

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Matt

I give away about 99% of all my technology and digital training content, completely free of charge, because I want to see other agents have the same kind of success that I've had. But one thing I charge for is my Ultimate Website technology. This is the web technology I created for myself that turned my real estate practice around overnight, and now I license it agents everywhere. But right now it's too popular and is currently waitlisted. Click here to get on the website as soon as possible and I'll notify you as soon as new invitations become available.

Comments 18

  1. author Tweets that mention Max-Bang Series: Incorporate Yourself! « Blog, Matt. Blog! — Topsy.com posted April 7th 2010. 7:55 pm Reply

    […] This post was mentioned on Twitter by Matt Jones. Matt Jones said: Max-Bang Series: Incorporate Yourself! – http://tinyurl.com/yclwmyu […]

  2. author Marcia Holcomb posted April 8th 2010. 11:16 am Reply

    I am now a LLC, would it benefit me to Incorporate?
    Our accountant files jointly on our taxes. He does not file one for the LLC. I use my mileage for tax break.
    Thank you for your help and your time.

    • author Matt Jones posted April 8th 2010. 3:22 pm Reply

      Thanks for reading and for your comment! Every state is different in its details, but a corporation is typically cheaper to operate and provides the same or better limits to liability. As for the tax advantages of the LLC versus a corporation, I’d ask your tax professional for the details. For me it is an advantage to be a C corporation.

  3. author Brenda Sours posted April 8th 2010. 11:17 am Reply

    Awesome information, and sure makes me want to investigate further ! I’m hoping with the steady increase in people moving to Austin my business will increase enough that I will be making so much money I need all the tax breaks I can get…here’s to a great year !

  4. author John K. Spear posted April 8th 2010. 12:01 pm Reply

    Matt–didn’t you forget the small issue of federal & state corporate income taxes? Or here in Texas–corporate franchise taxes? Remember that while Mecorp could pay out most of its revenue in salaries and deductible business expenses, it would have to recognize taxable income in order to be able to pay out any meaningful amount of dividends–which would of course amount to double taxation on same–not just the 15% tax rate you mention here.

    • author Matt Jones posted April 8th 2010. 3:31 pm Reply

      Hey John, thanks for reading and for your comment. Nope! I didn’t forget corporate taxes. On an S corporation, there is no additional taxation, just pass-through dividend without the burden of FICA. A C corporation does have double taxation, on taxable income (which is after deducting all business expenses). Most agents could save a lot of money by being incorporated, if for no other reason than beating the FICA taxes. Thanks again for reading.

  5. author Jeff Klaus posted April 8th 2010. 2:32 pm Reply

    What type of Corporation do you recommend Matt? LLC, S-Corp, C-Corp?
    That would be helpful… and thanks for the post!
    Jeff

    • author Matt Jones posted April 8th 2010. 3:36 pm Reply

      Thanks for reading and for your question. A rule of thumb would be S corporation if you don’t have lots of expenses. C corporation if you do. I’m personally not a fan of LLCs as they are very expensive to maintain and provide no real benefit to offset the additional expense. Thanks again!

  6. author Richard K posted April 8th 2010. 11:47 pm Reply

    Thanks, for the info on incorporating, but what if you are managing with a minimal wage and also, allowed to by and sell. Is that a conflict or is it treated separte enity?
    That is the agent selling RE; by the way I’m a Broker.
    Thanks for your response!!

    • author Matt Jones posted April 9th 2010. 4:48 am Reply

      Thanks for reading and for your note. Great questions. Obviously, if an agent is producing very little it would not justify the expense of incorporating, albeit small. The benefit derived would not exceed the cost. If the agent starts producing over about $30,000 in revenue (to him or her) then it’s probably time to start thinking about it. As to conflicts, most states see the corporate entity for what it is — asset protection and tax savings. The agent is “technically” dual affiliated (with both their corporation “firm” as well as the brokerage they work for). I hope that answers your questions. Thanks again for reading!

  7. author Joe Sheriff posted April 11th 2010. 9:42 am Reply

    Don’t forget that when you decide to buy a home for yourself, your friendly loan officer who’s been kissing your butt for two years is going to ask you for your tax returns! Then he’s going to go straight to the bottom line income and use that to qualify you!

    • author Matt Jones posted April 11th 2010. 2:46 pm Reply

      Certainly, if you want to look like you have lots of money, then be a sole proprietor and pay the government plenty. I’ve never had problems buying a home, although this last time I did have to pressure my local banker into financing me or I’d go elsewhere. You’re correct: It’s hard to qualify for a $780,000 house with income of $40,000. In the end I got my jumbo at a pretty decent rate and I stayed with my bank. Myself, I’d rather keep the money than give it to Uncle Sam so I look good on paper. I kind of like only making $40,000. Thanks for reading and for your point, Joe.

  8. author Steven posted April 25th 2010. 3:00 am Reply

    I am now a LLC, would it benefit me to Incorporate?
    Our accountant files jointly on our taxes. He does not file one for the LLC. I use my mileage for tax break.
    Thank you for your help and your time.

  9. author Karen posted April 25th 2010. 4:12 am Reply

    Matt–didn’t you forget the small issue of federal & state corporate income taxes? Or here in Texas–corporate franchise taxes? Remember that while Mecorp could pay out most of its revenue in salaries and deductible business expenses, it would have to recognize taxable income in order to be able to pay out any meaningful amount of dividends–which would of course amount to double taxation on same–not just the 15% tax rate you mention here.

  10. author Joseph posted April 25th 2010. 8:15 pm Reply

    I am now a LLC, would it benefit me to Incorporate?
    Our accountant files jointly on our taxes. He does not file one for the LLC. I use my mileage for tax break.
    Thank you for your help and your time.

  11. author Simon posted April 26th 2010. 12:17 am Reply

    Awesome information, and sure makes me want to investigate further ! I’m hoping with the steady increase in people moving to Austin my business will increase enough that I will be making so much money I need all the tax breaks I can get…here’s to a great year !

  12. author David posted April 26th 2010. 11:20 am Reply

    What type of Corporation do you recommend Matt? LLC, S-Corp, C-Corp?
    That would be helpful… and thanks for the post!
    Jeff

  13. author Anonymous User posted January 26th 2011. 10:43 am Reply

    What type of Corp are you talking about C or S ?

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