Is a Sole Proprietorship the Best Form of Ownership for a Real Estate Broker?
An important early step in forming any business -- including a real estate broker business -- is to decide the best form of ownership. You can opt to operate without a formal legal business designation as a sole proprietor or elect to operate as a limited liability company or corporation. Deciding which type of business works best for you is an individual decision, but a few characteristics of the entities make the decision a relatively simple one.
Unlike an LLC or a corporation, a sole proprietorship offers no liability protection, so the real estate broker who operates as a sole proprietor has full personal liability. If you are sued by a homeowner, client or by another broker, or fined by your local real estate board, you are personally financially liable. All your assets, even your residence, are at risk. Because of this lack of liability protection, a sole proprietorship is not the best way to run your real estate broker business.
As a broker, you deal with lots of paperwork and formalities. Being a sole proprietor wouldn't add to this burden, as a corporation would. In addition, a proprietor isn't responsible for annual reports or separate income tax filings. Maintaining your brokerage as a sole proprietorship is the easiest and least expensive of your options. However, these advantages are not sufficient to counteract the lack of liability protection. Other disadvantages to the proprietorship include the fact that the business dies when you do, which is a problem if you want to pass on the brokerage upon your death. Other than a spouse, you can have no partners to help you shoulder the burden of ownership. These last two factors make it difficult to get business loans, which can prevent you from expanding your business.
If you are going to own and operate a brokerage, meaning you have salespeople or realtors working for you, form an LLC or corporation. There a risk of lawsuits regarding employee errors or omissions filed against you as the broker. Even if your realtors are considered independent contractors rather than employees, you as the broker are exposed to liability for their actions or mistakes.
Your state or local government may require you to file a fictitious business name form if you operate your business with a name other than your own. In addition, some states require a person to be the broker of record, even if you form a separate entity such as a corporation. Regardless of the form of ownership, you can be held personally liable for your actions or mistakes occurring when you act as the agent, such as when selling your own listing. This makes it advisable for you to obtain errors and omission insurance for yourself and for any staff, regardless of the business structure.