How to Establish Your Business Entity
April 20, 2018 |
A little-known provision in license law permits licensees to receive their commissions in the name of their business entity rather than personally. Many licensees see tax and other benefits from establishing an entity for their real estate practice. For those licensees that provide other services (inspection, home staging, construction, consulting, etc.), setting up a business entity contains more than just tax advantages, it also provides liability protection.
Business entities allow an owner to avoid personal liability for the debts of a business. Only the business is responsible for the debts and liabilities of the business. Consequently, creditors can only collect from the business assets, not the personal assets of business owners. There are certain steps you must take however to legally establish your business entity.
1. Decide what type of entity you want
LLC’s are the most popular for personal services, so we will focus on this type of entity. LLC’s and are “pass-through” tax entities. This means any profits or losses from the LLC are passed to your personal tax return. Your LLC can be a single purpose entity (used for one primary purpose) which would shield the assets of the single purpose entity from the assets of other business entities. For example, if you own an investment property, you may want to have it titled in a single purpose entity, separate from your other enterprises. This way if there is litigation involving your investment property, the assets of your other businesses are not in jeopardy.
2. File your Articles of Incorporation
To create your LLC, you need to file what is called “Articles of Incorporation” with the Secretary of State. This is necessary step for your business entity to legally transact business in the state. Most states permit this to be filed online and have a nominal filing fee. You will need to designate the name of your business and identify a person that will serve as your statutory agent (can be you or someone else).
3. Create an Operating Agreement
If you have partners or investors, you will need an Operating Agreement. Partners or investors in an LLC are called “members.” The Operating Agreement outlines the purpose of the business, the investment of each member, identifies the managing member, member duties, and procedures when a member leaves the business or passes away.
4. Obtain an EIN
Next, you will need to apply for and obtain a tax identification number or EIN. An EIN is obtained from the IRS and is required for you to set up a bank account in the name of your LLC.
5. Purchase Insurance
Depending on your business enterprise, you may need insurance to protect your business (and you) from any losses that occur during the normal course of business. A new product for businesses includes cyber liability insurance, which should also be considered if you deal with customer’s personal financial information or are concerned about liability associated with a data breach.
6. Follow Corporate Formalities
The biggest mistake owners make is signing contracts in their names personally and not in the name of their LLC. If you sign a contract personally, you are personally obligated on the debt and cannot use the LLC as a shield. If your LLC is the contracting party, the LLC needs to sign the contract, not you personally. How is that done? Let’s say your LLC is named, “Real Estate, LLC”, you will sign documents as follows:
Real Estate, LLC
By: Suzie Smith, Member
By signing the contract in this matter, the LLC is the contracting party, and Member Suzie Smith is signing only in her capacity as a member of the LLC, not personally.
7. Track Income and Expenses
Any income and expenses will impact the bottom line of your LLC, so be sure to track all of your mileage, membership fees, and other expenses.
If you have questions about the legalities of setting up your business entity you should consult with an attorney and of course direct any tax questions to an accountant or CPA. Having your own business entity can provide a lot of benefits (both financial and liability protection), so consider whether setting up a business is right for your practice.