By Karen E. Klein Q: I am a real estate agent, and many people tell me that I should incorporate for the benefits of taxation on my income. Is this true, false, or should I be doing something else? -- S.T., Coral Springs, Fla.
A: You need to talk to an accountant and give him or her specifics about your business -- how it functions and how money comes in and is spent -- before making this decision. The tax implications of incorporating and which type of corporation to choose are complex, and no generic "right or wrong" answer is possible. There are definite advantages to incorporating or forming a limited liability company (LLC), but annual expenses and paperwork are also involved that may make the process too cumbersome and expensive for you.
In general, incorporating does offer tax advantages, says David Eichman, a West Hollywood (Calif.) attorney who specializes in real estate and business formation. "Many real estate agents incorporate so they can pay themselves a formal salary and get other employee and retirement benefits that aren't available to a sole proprietor," Eichman says. "Health expenses can also pass through certain kinds of corporations."
MATTER OF PRESTIGE. Another benefit of incorporating is the limited protection from personal liability that goes along with the business entity. "This issue gets tricky when you're in a licensed profession like a Realtor, attorney, or accountant," Eichman warns. "People think that if they incorporate, they'll be able to get out of all lawsuits filed against them. But, for instance, if there's a malpractice claim against a licensed professional, a corporation does not shield him or her from liability."
For general business purposes, however, such as defaulting on a lease or general debt, a corporation does offer protection from personal liability.
A third reason to consider incorporation is the prestige factor that comes with the "Inc." after your business name. If potential clients see that you're operating as an incorporated entity, they know right away that you have the money and the business acumen to set up a corporation. This may count for something in the way they view you as a professional. And if you serve clients outside your immediate geographic area, they won't necessarily know how big your real estate outfit is.
Says Eichman: "You may be sitting alone in an office, but if they're calling Joe Johnson, president of ABC Realty Inc., that's different than calling Joe Johnson, sole proprietor."
Have a question about your business? Ask our small-business experts. Send us an e-mail at email@example.com, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information. Only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally. Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues