Should Realtors Incorporate Their Business? The Pros and Cons of PRECs

The grind of being a realtor can be rewarding. But when tax season arrives, a big chunk of your income seems to disappear, leaving you frustrated. You spend hours closing deals and building client relationships, only to see much of your hard-earned money go toward taxes.

Is there a better way to manage your income more effectively?

For Canadian realtors, incorporating as a Personal Real Estate Corporation (PREC) could be the answer.

Incorporating comes with benefits, like tax savings and better financial planning. However, it also has downsides, such as added costs and increased responsibilities.

Let’s break down the pros and cons to help you decide if this option is right for you.

What Is a Personal Real Estate Corporation (PREC)?

A PREC is a legal structure that allows realtors to operate their business as a corporation instead of as an individual. This setup separates personal and business income.

Realtors working through a PREC are both employees and shareholders of the corporation. They can choose how to withdraw their earnings, such as through a salary, dividends, or a combination of both.

PRECs can provide tax and financial advantages, but they also come with specific legal and administrative requirements. These rules vary depending on the province, so understanding your local regulations is crucial.

Advantages of Incorporating

Incorporating can offer several benefits for realtors, especially those with higher incomes or long-term financial goals. Below are the key advantages that make this option appealing.

1. Lower TaxesA PREC allows you to take advantage of lower corporate tax rates. Income left in the corporation is taxed at a lower rate than personal income. This helps reduce taxes on money you don’t need to use immediately and allows you to reinvest those funds.

2. Income SplittingYou can share income with family members who are shareholders in the corporation. If those family members are in lower tax brackets, this strategy can reduce your overall tax bill significantly.

3. Expense DeductionsOperating as a corporation makes it easier to claim legitimate business expenses. These could include marketing costs, office supplies, and professional fees. Deducting these expenses lowers your taxable income.

4. Retirement SavingsMoney retained in the corporation can be invested in assets like stocks or property. This creates a financial cushion for the future and helps you save for retirement.

5. Professional ImageRunning your business as a corporation can make you appear more professional to clients. This may help you stand out in a competitive market.

   
   

Disadvantages of Incorporating

While incorporating has its benefits, it also comes with challenges that might not work for every realtor. It’s important to consider these downsides before making a decision.

1. Startup and Maintenance CostsSetting up a PREC involves paying legal and accounting fees. Ongoing expenses, like annual tax filings, professional bookkeeping, and payroll management, can also add up over time.

2. Administrative ResponsibilitiesOperating a corporation requires more paperwork and responsibilities. You’ll need to keep detailed records, file corporate taxes, and manage payroll. Many realtors hire professionals to handle these tasks, which increases costs.

3. Limited Access to FundsAlthough money kept in the corporation is taxed at a lower rate, withdrawing it triggers personal taxes. This can make accessing your income less flexible.

4. Not Suitable for EveryoneFor realtors with moderate incomes, the costs of incorporation might outweigh the benefits. If your income is inconsistent or low, staying as a sole proprietor may be a better choice.

5. Complications When Closing the BusinessClosing a corporation is more complicated than ending a sole proprietorship. Winding down a PREC requires following legal and tax procedures, which can be time-consuming and costly.

   
   

Who Should Consider Incorporating?

PRECs tend to be most beneficial for high-earning realtors who can afford to leave some income in the corporation. Realtors with significant business expenses or family members to share income with may also find incorporation worthwhile.

However, for newer or lower-earning realtors, the added costs and responsibilities may not be justified. It might be better to wait until your business grows and your income stabilizes before incorporating.

Seek Professional Advice

Before deciding to incorporate, it’s important to consult with professionals. A corporate lawyer can help you navigate the legal process and ensure compliance with provincial regulations.

An accountant can advise you on tax strategies and determine if a PREC will truly benefit your financial situation.

Conclusion

Incorporating as a Personal Real Estate Corporation can offer Canadian realtors tax savings, better financial planning, and a professional edge. However, it also comes with costs, added responsibilities, and limitations on accessing funds.

Evaluate your income, business needs, and long-term goals before making a decision. Professional guidance can help you weigh the pros and cons and determine if a PREC is the right move for your career.

For high earners and established professionals, a PREC can be a valuable tool. For others, staying a sole proprietor might be the smarter choice for now.