Financial management is the Achilles heel of many real estate agents.

One of the largest problems for most businesses is controlling the finances and cash flow of the business. A real estate agent’s practice is no different. How we categorize, budget and structure our business financially will determine our profit, savings, and taxes.

Too many agents are sloppy with their bookkeeping and accounting. We operate too loosely in controlling our income, revenue, and expenses. I am going to share with you a two-step process of how to set up your books.

Step #1: Establish a separate checking account for your business. Don’t co-mingle personal and business funds.

You need to create an arm’s length separation from yourself and your company. You might even use one credit card for only business expenses. That will save you time in sorting out the bill at month’s end. The business pays one card statement that goes to the office. The personal card is mailed to the house. If you put a lot of your expenses on that designated business credit card you will be able to write fewer checks and have easier accounting. You will also be able to float expenses and potentially earn airline miles or reward points as well.

Every commission check goes into the business account. You are paid out of the business account as an expense. Determine a monthly salary to draw out of the account and learn to live on it.

Step #2: Incorporate as a company or private corporation.

Consult your accountant and tax attorney, but there are reasons I believe you want to incorporate. It reduces your liability if something happens while doing business. A well constructed, even S, corporation has a corporate shield or corporate veil. What that means is that your personal assets are not exposed in the event you get sued.

What if, for example, you, or worse, a staff member gets into a terrible auto accident and someone in the other car is injured severely. That injured party, if it’s a staff member caused accident, will name you in the suit, guaranteed. You are the one with the money. If the suit goes beyond the insurance level you have in force because of the corporation your personal assets are sheltered from the litigation. If you lose, they can have the assets in the corporation and you will be able, in a few days, to establish another corporation and start working again.

There are currently significant tax benefits as well. You will be able to draw a salary from the corporation just as if the money was paid to you directly. You will have to pay the employer and employee side of the taxes since you are the registered holder of the corporation. You pay that now anyway. You will pay in payroll tax for the employee and employer along with your federal tax withholding or estimates for that income.

The good news is you can take a substantial amount of income as a stock dividend rather than in salary or as a bonus. That stock dividend would be taxed at capital gains rates without FICA, medical or Medicare expenses or employer or employee taxes segments. You would owe tax but only of the prevailing capital gains rate rather than the tax rate that you could be charged if you took the money as salary or bonus income. Federal and State laws change so you should consult your tax advisor and attorney to receive their interpretation of the current Federal and State laws.

Published: May 20, 2011

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Dirk Zeller is a sought out speaker, celebrated author and CEO of Real Estate Champions. His company trains more than 350,000 Agents worldwide each year through live events, online training, self-study programs, and newsletters. The Real Estate community has embraced and praised his six best-selling books; Your First Year in Real Estate, Success as a Real Estate Agent for Dummies®, The Champion Real Estate Agent, The Champion Real Estate Team, Telephone Sales for Dummies®, Successful Time Management for Dummies®, and over 300 articles in print. To learn more regarding this article, please visit www.realestatechampions.com.