Allow me to introduce myself; I’m the XBanker – a business-financing insider, shedding some light on the murky world of small business lending and business credit. This is the first post in a 4 part series focusing on business strategies for Real Estate Professionals.
Tom Peters’ article in Fast Company several years ago: The Brand Called You, had a drastic impact on
my life and career. I quit looking at myself as an employee and instead as an independent business and brand. I highly recommend this article to everyone, regardless of career. Since branding isn’t my bag – I’m not going to pretend that it is by discussing it here.
If you invoice for your services or receive a 1099 from an “employer” – chances are that you pay too much in taxes, unduly burden your personal credit and are missing out on a huge opportunity to access cash and credit for growing your business.
Last year I invited a handful of listing agents into my home to win my business. Each conversation turned to the very topics that I’m going to address in this series. One of the agents in particular was walking the razor’s edge. His family-run real estate team was making close to $1m/year in commissions. This was on top of a number of income-generating investment properties. After 15 years in business, this professional was still operating as a Sole Proprietor. Not only was he paying way too much of his income in taxes, he was literally a car accident away from losing everything. If that wasn’t enough, he needed float to cover his team in a slowdown and reserves to jump on investment opportunities – without drawing upon the equity in his home. My advice for him is the same that I extend to you.
The first thing that you need to do is to incorporate. I’ll keep this really simple: form an S Corporation. My simple rule is: corporations for business activities, LLCs for holding assets (such as real estate); if you have a business partners that you aren’t married or related to, form an LLC for your business (but still form an S Corporation for your interest and income). Your tax advisor should be able to adequately address the advantages of these structures. I’ll address tax benefits in my next post, but please keep in mind that tax savings is just one component of what I’m addressing; obtaining capital is my primary focus.
Forming a corporation is the first step of separating you from your business activities. Once the separation is complete, you can build a credit profile for the business and begin to obtain business loans and lines of credit. I’ll provide some tactical strategies for optimal positioning for your corporation to obtain financing. In my next post, I’ll focus on the tax benefits of creating this separation.
Hi Jeff, thanks for posting the business advice. We have so many things to think about and keep track of! By the way, I agree with you about Dustin! He is great.
Hey Jeff...welcome aboard..I am also late into the real estate career after 30 years spent in a world of employees and inventory, I too see agents with no idea about how to cover their expenses, or taxes..If I were on the committee for agent training I would make it mandatory for a class called " Lets pretend you have a great year" ...We would go over the results of hitting the jackpot without having the proper setups in place FIRST...I have bought businesses in the past from owners who became overnight sucesses and didn't buy equip, or have proper corporate structure..the tax bill was enough to put them under after they had been the most successful..
Good for you. keep on posting..its up to those of us that know how to share with our fellow rainers...who else is going to..their brokers??? I don't think so...I look forward to seeing your followup posts in this series.
* best post I've read today.
Thank you.
Hi Jeff - I've read a number of times that all of us should consider a S corp, and I keep meaning to look further into to it understand the reasons why. I'll check out your links to learn some more on this...thanks for the post!
Ann
I am in the process of doing a LLC for my staging business so to protect my personal assets. I think eventually I will switch to a corporation as well. But is it necessary to do both at the same time?
Cheers,
Cindy
Jeff,
When it rains, it pours-this is a tsunami!
All of these posts are guts level and info forward. I am glad to see you here - and wherever you are.
...You could not sqeeze all of these into a twitter, that is for sure!
Steve
Cindy, I'll address your question in more detail in the 3rd post of the series. In short, the history of your business will impact your ability to get financing - so I would form your entities sooner than later. Like I stated in the post, most businesses will do best with an S Corporation (unless you have partners). Before you look to employ a multiple entity strategy make sure to speak with a competent tax adviser - keep it simple.
Mike - Amen brother!
I look forward to all your feedback on the rest of the series.
- The XBanker
Hi Jeff, Goo dot see you. I've had an S corp for 10 years now. It definitely helps in the tax area. In Florida a salesperson cannot be an officer or director of an real estate s corp. They can however be a PA. I would imagine all States have different laws relating to this for the real estate professional.
So who is this Xbanker? That would piss me off.
Jeff - since laws (and taxes) are constantly changing, it's important for us to know the pros and cons of various entity arrangements. I'm looking forward to your next posts.
Thx all...
@ Bryant...The XBanker is my evil twin...adopted the name with my blessing and support. The XRealtor would have been next, but NAR would shut that down with the quickness...Look for a series of 'XProessionals' in various but related industries :)
Good topic. I would like to add consider getting an umbrella insurance policy so that just incase you are sued, your personal assets are protected.