Knowing your State’s Regulatory Requirements and Choosing the Right Business Entity for Your Property Management Business
While there are a lot of things to research and learn before starting your own property management business, we’ve highlighted some of the of the first steps below.
Know your State’s Rules
Do you need to be a licensed broker, a real estate agent, or neither in order to be a property manager? For example, CA requires you to be a licensed broker, while Vermont does not. The best way to find out your state’s rules is to look on the department/bureau of real estate's website. There you will find guidelines and rules ranging from what type of education is required, to how trust funds should be handled, and the timeframes in which you are required to give tenants back their security deposits.
Decide if you will work under a broker or will you create your own business
You should decide if you are going to run your own property management business or if you will work under a licensed broker. There are advantages and disadvantages to both.
Advantages of Working Under a Broker:
- Low barrier to entry
- Ability to learn from someone with experience
- Infrastructure (office, systems, access to advertising material)
Disadvantages of Working Under a Broker:
- Share a % of your fees
- Possibly less flexibility in doing things your way
If you decide to work under a broker make sure you know the terms of the agreement. What systems do they use? What percentage of your fees will the broker take? Do you get along with the broker and others in their office? Answering all these questions will be important in ensuring a good fit between you and your employer.
Advantages of Working for Yourself:
- Control over how things are run
- You retain 100% of the property management fees you collect
Disadvantages of Working for Yourself:
- Higher barrier to entry
- Need to build your own infrastructure (office, systems, advertising)
If you choose to go at it alone, you may want to find a mentor, one who already does property management. They can help guide you and give you advice as you start your own business.
Choosing the Right Entity
If you decide to start your own business, you’ll need to decide what type of legal entity you will form. This decision will impact how much you pay in taxes, how much paperwork you will have to file, and also the amount of personal liability you will have. You’ll also want to check with your city and acquire the proper permits (such as a business tax license) that may be required.
Here is a brief summary of the common business entities:
|Sole proprietorship||Easy to form.||Owner is personally liable for all financial obligations of the business.|
|Partnership||All income is taxed proportionately to each of the partners who report it on their personal tax returns. Any losses are "passed through" to partners to report on their individual income tax returns||Each partner is still personally liable for the financial obligations of the business.|
|Limited Liability Company (LLC)||Owners can only be held personal liability for up to the amount they invested in the company. Profits and losses can be passed through to owners without taxation of the business itself (no double taxation).||Legal and tax complexity relative to a sole proprietorship.|
|Corporation||The corporation (not you) is liable for the financial obligations of the business||Potential for double taxation and complex rules and associated paperwork.|
Each business entity has its own advantages and disadvantages. It is important to do your own research and if needed seek legal or tax advice.