Should I Start an LLC for My Real Estate Brokerage

Starting a limited liability company (LLC) for your real estate brokerage can provide several benefits.

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For a real estate brokerage, lawsuits can arise from things like defaulting on a loan used to startup your business, poor advice that resulted in loss for the client, and property damage while showing a potential buyer a property.

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your real estate brokerage seem more credible.

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

What is a Real Estate Broker and What Do Brokers Do?

A real estate broker is a real estate licensed professional that manages the daily business operations of a brokerage firm. These real estate experts can work independently or through a brokerage firm to sell properties. Their responsibilities include lawfully managing real estate transactions, properly completing necessary documents, and providing accurate reports of funds in escrow.

If you’re ready to become a licensed real estate professional with the goal of becoming a broker, learn more about how to easily become a licensed real estate agent here.

Do I Need an LLC as a Real Estate Broker?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should start an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for a Real Estate Brokerage

By starting an LLC for your real estate brokerage, you can:

Protect your savings, car, and house with limited liability protection
Have more tax benefits and options
Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Real estate brokerages will benefit from liability protection because errors on real estate documents, breach of contract, and a host of other things can lead to legal trouble for realtors and real estate firms.

Example 1: You take out a loan to expand your real estate brokerage. You later default on the loan, and the lender files a lawsuit against you. As long as you did not personally guarantee the loan, LLC will protect your private assets if your business ends up going bankrupt in the process of paying back the loan.

Example 2: A client sues your brokerage for negligent advice during a property transaction. If the lawsuit is ruled in your client’s favor, liability protection will ensure that only your business assets are affected and that your personal finances remain safe.

Example 3: You have an employee who accidentally damages a property while showing it to a potential buyer. The owner files a compensation lawsuit, claiming negligence on behalf of your agency. With liability protection in place, your personal assets will be protected from the lawsuit.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for aReal Estate Brokerage

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

Credibility and Consumer Trust

Real estate brokerages rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying forsmall business loans,grants, andcredit.

As you start or continue to grow your real estate business, we recommend getting a subscription to foreclosure.com, where you can find great deals on local, and low-cost (distressed, tax liens, etc.) investment properties. The database updates twice a day, so you can quickly secure your next real estate deal.

Northwest will start an LLC for you for just $29 (plus state fees).

Get Started

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

You canhire a professional LLC formationservice to set up your LLC for a small fee
Or, you can choose your state from the list below to start an LLC yourself

Select Your State

Alabama LLC
Alaska LLC
Arizona LLC
Arkansas LLC
California LLC
Colorado LLC
Connecticut LLC
Delaware LLC
Florida LLC
Georgia LLC
Hawaii LLC
Idaho LLC
Illinois LLC
Indiana LLC
Iowa LLC
Kansas LLC
Kentucky LLC
Louisiana LLC
Maine LLC
Maryland LLC
Massachusetts LLC
Michigan LLC
Minnesota LLC
Mississippi LLC
Missouri LLC
Montana LLC
Nebraska LLC
Nevada LLC
New Hampshire LLC
New Jersey LLC
New Mexico LLC
New York LLC
North Carolina LLC
North Dakota LLC
Ohio LLC
Oklahoma LLC
Oregon LLC
Pennsylvania LLC
Rhode Island LLC
South Carolina LLC
South Dakota LLC
Tennessee LLC
Texas LLC
Utah LLC
Vermont LLC
Virginia LLC
Washington LLC
Washington D.C. LLC
West Virginia LLC
Wisconsin LLC
Wyoming LLC

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

All businesses need insurance to protect their business assets — even LLCs. This is because the limited liability protection from an LLC protects your personal assets, not your business assets.

Real estate brokerages need insurance to protect against potential risks they may face while operating. These risks include damage to property, theft of assets, and liability related to employee activities or recommendations. Insurance helps these brokerages manage financial losses in the event of an accident or lawsuit by providing coverage in the form of compensation or legal expenses.

Common Situations Business Insurance May Cover for a Real Estate Brokerage

Example 1: During an open house event you host in a home with an extensive collection of antiques, you accidentally knock an expensive figurine off a shelf and it breaks. General liability insurance would cover the replacement cost of the figurine.

Example 2: While you show a potential buyer around a house, he slips on a cord you failed to cover, breaks an arm, and decides to sue. General liability insurance would cover the potential buyer’s medical bills, your legal fees, and any damages awarded by a court.

Example 3: While conducting a walkthrough of a home after a showing, you fail to turn off the bathroom fan. After you leave, the fan motor overheats and ignites a fire that damages half the home. General liability insurance would cover the cost to repair or replace the damaged home.

Example 4: You want to partner with a large franchise company that requires evidence of general liability insurance. Having this coverage would help fulfill your eligibility requirements.

Other Types of Coverage Real Estate Brokerages Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all real estate companies should obtain:

Professional Liability Insurance

Because most real estate transactions involve large sums of money, professional liability insurance is essential. This coverage, also known as “errors and omissions” insurance, protects you when a client sues because they are unhappy with their transaction, claiming your professional advice and representation is at fault.

Commercial Auto Insurance

If you use a personal car for business activities, your personal auto policy may not cover losses from a work-related accident. State law mandates minimum levels of commercial auto coverage to protect both you and others on the road in the event of an accident. While each state requires a certain level of insurance for vehicles on public roads, the minimum requirement only offers basic protection. As such, consider purchasing limits greater than those required by state law.

You can purchase commercial auto insurance as a standalone policy or as part of a business owners’ policy (BOP).

Commercial Property Insurance

As a real estate agent, you know how expensive it can be to repair or replace a damaged building. If you own the building in which you operate, you need commercial property insurance to cover your building and the business property stored there in the event of a fire, burglary, or natural disaster.

You can typically purchase this coverage as part of a business owner’s policy (BOP).

Commercial Umbrella Insurance

For many of your clients, real estate transactions are expensive and emotional. As a result, you face greater liability exposure than other businesses. While your general liability policy covers most claims, some lawsuits may be so expensive that they threaten to exhaust the limits of your primary coverage. Commercial umbrella insurance protects you from paying out-of-pocket for legal fees and awarded damages that exceed your primary policy.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circ*mstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance and professional liability insurance.

Read our Small Business Insurance article for more info.

To start a real estate brokerage business, you’ll need to budget for office space, a business license, insurance, marketing campaigns, utilities, and employee expenses. You’ll also need to set aside about $50,000 to cover expenses during your first year of business as it can take a while before you close your first deal.

Visit our How to Start a Real Estate Brokerage guide to learn more about the costs of starting and maintaining this business.

Operating expenses for a real estate business include rent, marketing, staff expenses (including commission shares on sales), utilities, and insurance.

Learn more about running a real estate brokerage.

A real estate business primarily makes money by earning commissions on property sales.

Learn more about starting a real estate brokerage.

Real estate businesses coordinate large financial and legal transactions between buyers and sellers of real property.

The average profit margin for a real estate professional is at least 3%. A firm that participates in $10 million in transactions annually will see a gross profit of about $300,000.

Learn more about starting a real estate brokerage.