An S corporation is a corporation, partnership or limited liability company that elects to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. Generally, such businesses are not subject to corporate income taxes, because both income and losses are allocated to the company's owners in proportion to their shares in the company. For a self-employed real estate agent, the advantages of setting up a Subchapter S corporation relate to tax and liability issues.
An S corporation can divide profits between salary and dividends. Although the real estate agent must pay personal income taxes on the entire profit, he will pay his self-employment tax only on the salary portion. If he earns $50,000, for example, he can take perhaps $35,000 as salary and the remaining $15,000 as a corporate dividend. His self-employment tax will be based only on the $35,000 salary portion. The $15,000 dividend portion will be taxed as personal income. Additionally, because an S corporation doesn't pay corporate income taxes, the real estate agent who forms an S corporation avoids double taxation.
Limited Personal Liability
Real estate agents usually are covered by errors and omissions insurance that protects them if they're sued for failing to fulfill their professional obligations. Errors and omissions insurance doesn't necessarily provide coverage for every contingency, however. An S corporation limits the agent's liability, and protects her personal assets if she's sued. In the event of a successful lawsuit, only the S corporation's assets can be seized; the broker's personal assets are not involved. That means a real estate agent who forms an S corporation can't lose more than she has invested in her company.
Deductible Business Losses
An independent real estate agent with an S corporation can claim his corporation's losses as his own, and can write off the losses as a deduction on his personal income tax return. A real estate agent's income can fluctuate widely from year to year. The ability to deduct losses, and not just expenses, can result in significant tax savings.