Agents Realtors

The basics of taxation for real estate professionals depends on the real estate professionals goals and what steps they take to increase profits, decrease taxation, provide growth opportunity, and minimize risks. In the first series of the article set, we discussed the common vehicles used for solo, partnership, and small to medium size brokerages.

In this second series, we will address the use of c-corporations and the advantages and disadvantages of this type of business structure. Out of all the structures, c-corporations are the most complex and expensive to administrate. Record keeping, accounting, legal, and insurance all tend to be more expensive to administer. Before venturing into this type of structure, the shareholder(s) should understand that necessity of the time commitment and resources needed. At the very least, an accountant, attorney, and knowledgeable broker are a must.

All corporations are considered c-corporations unless a sub-chapter election is filed. C-corporations are primarily used when shareholder(s) exceed the threshold of s-corporations. Public trading is wanted or an Initial Public Offering is planned, and when there are franchising and growth accumulation for acquisitions.

As we learned in the earlier article, the maximum shareholders in an s-corporation are 100. In comparison to s-corporations, c-corporations have no limits in shareholders. Ownership also does not have to be equal and can be public or private. Public ownership is made subject to approval from the US Security Exchange Commission. Further, deductions for benefits are generally more lucrative for c-corporations vs. as s-corporation have limitations on deductions.

C-corporations have received a bad reputation for double taxation. Double taxation happens when the entity is taxed on the money that the c-corporation earns during the year and again when the dividends are paid to the shareholders. No dividends, no capital gains tax is paid; thus, no double taxation is present. The entity can normally prevent double taxation by zeroing or causing the profit to be near zero at end of the year. This is done by increasing salaries and 1099 payments to the employees, contractors and executives. It has been our experience that this strategy works best in private c-corporations and in public companies looking for growth opportunities.

The entity also enjoys a lower taxable rate on the first $50,000 dollar of income. Often the amount is less than that of an s-corporation. The rate for c-corporation on the first $50,000 is 15% vs. the rate on the s-corporations pass through to ordinary income taxes. The rate can vary and can be as high as 35%. Again, the costs for c-corporations can be very costly to administer; thus, a complete review and plan, with a knowledgeable accountant and attorney, is imperative to maximize savings.

Brokers and agents should assess what their desires and goals are. Do they want to create a small solo practice, a medium size or regional brokerage, or franchising or national company? The goals to begin with can help shape the finances for years to come; thus, before the broker or agent incorporates, they should consult competent professionals. Whether an LLC, s-corporation, or -corporation, there are advantages and disadvantages of each. You should perform due diligence to make the best and most informed decisions. This will help to make sure that your dreams can become reality!

If you would like more information or a consultation on professional management services, please visit Charles H. Maness, MSACC, Accountant and Managing Broker or Kristen E. Richbourg, ESQ and Accountant at The Tax Advisers LLC. Our number is 404-438-8642 or through our brokerage at 678-580-0470.

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