Personal Real Estate Corporations make it possible to enjoy the benefits of incorporation without establishing a traditional registered business entity.
Before creating a PREC, it’s necessary to understand the basic concepts and seek guidance from a professional accountant or legal advisor.
Key Takeaways
- A PREC allows real estate agents to incorporate, providing liability protection and tax benefits.
- Benefits include income splitting, tax savings, retirement planning, and expense deductions.
- Drawbacks include setup costs, regulatory compliance, and complexity in management.
- A PREC differs from an LLC in structure, ownership, and taxation methods.
Table of Contents
What Is a PREC?
A PREC is a business structure allowing real estate professionals to operate as a corporation rather than a sole proprietor.
The idea of doing real estate business as a corporation is mainly to enjoy the benefits of liability protection. It’s a separate legal entity from its owners; hence, it protects their personal property in case of lawsuits or debt repayments.
What Are the Benefits of Using a PREC?
- Income Splitting: If you intend to include family members as corporation shareholders, a PREC can provide opportunities for income splitting. This can reduce the overall family tax burden.
- Tax Savings: Compared to individual real estate agents, corporations pay lower tax rates on income. This can allow agents to retain more of their earnings within the corporation, deferring personal taxes until the money is withdrawn.
- Retirement Planning: Agents can strategically invest in their future retirements by retaining earnings in the corporation.
- Expense Deductions: Operating as a corporation often allows for more business expense deductions, reducing taxable income.
Are There Any Drawbacks?
- Costs: Setting and maintaining a PREC requires dealing with legal and accounting professionals, which can be quite expensive.
- Complexity: Unlike sole proprietorship, managing corporations involves additional paperwork, including filing annual corporate tax returns and maintaining corporate records.
Restrictions or Requirements for Setting Up a PREC
Several requirements are in place to ensure compliance with legal and regulatory standards. Understanding these requirements or restrictions is necessary when setting up a PREC.
- Regulatory Compliance: To open a PREC, the individual establishing it must have a valid real estate license and must get approval from the local real estate regulatory body.
- Shareholders Restrictions: The individual establishing the PREC must be the controlling shareholder, holding all or most of the shares. Other non-voting shares can be given to family members (spouses or children) to facilitate income splitting.
- Business Activity Restrictions: The PREC can only carry out business activities for which the controlling shareholder is licensed. Also, interactions with clients and the public must be done by the registered agent.
- Taxation: A PREC must file its corporate tax return as a separate legal entity.
- Financial Reporting: All corporate records, including meeting minutes, shareholder agreements, and financial statements, must be accurate and kept by corporate law.
- Professional Liability: While a PREC can offer some liability protection for personal assets, real estate professionals are still personally liable for professional actions and must maintain appropriate professional liability insurance.
PREC vs LLC
While both are business entities common to real estate professionals, PRECs and LLCs serve specific purposes and offer distinct benefits.
Use Case
To register as a personal real estate corporation (PREC), the individual must be a recognized real estate professional and have a valid license. Real estate regulatory bodies set the rules of a PREC.
The limited liability company structure is a versatile option. It can be used for several types of businesses, including real estate, consulting, and more. This means anyone, including physicians without real estate licenses, can register a real estate LLC to manage investments, run a business, or hold assets.
Legal Structure
As the name implies, PRECs are limited to a single owner. The professional must be the controlling shareholder; only family members can hold non-voting shares.
However, LLCs have a “hybrid” structure. They combine elements of a corporation and partnership. Ownership isn’t limited to a single owner and can be distributed in any proportion. Members can be individuals, other LLCs, or even corporations.
Taxation
A PREC is taxed as a C Corporation. It pays corporate tax on its profit, and any dividends paid to shareholders are subject to personal income tax. This provides tax deferral benefits, as profits can be retained in the corporation at lower corporate tax rates.
LLCs, on the other, can follow “pass-through taxation” methods (S Corporation). By default, an LLC isn’t taxed at the entity level; profits and losses pass through to the members, who report them on their personal tax returns.
However, LLCs can also decide to be taxed as a C Corporation due to its tax planning flexibility.
Get Help from Experts at Physicians Thrive
Setting up a PREC can ensure real estate agents enjoy the benefits of a corporation like tax deductions and liability protections. However, it’s best to seek professional advice to know if it’s right for you.
If you ever need some of that advice, don’t hesitate to contact us at Physicians Thrive. Our team of experts would be ready to help answer any questions you might have.
