As of October 1, 2020, real estate professionals, like professionals in many other fields, are allowed to incorporate and register professional corporations. Before rushing out to incorporate, it is important to consult your accountant and legal counsel to determine if this is the best option for you. It is also important to keep in mind that while these corporations provide certain advantages to those who choose to use them, there are strict rules on how they are to be used.
Restrictions on Use
If you are intending to use a corporation as a Personal Real Estate Corporation (“PREC”), it is important to understand what distinguishes PRECs from other corporations operating in real estate.
A key difference is that a PREC cannot stand alone and provide services trading in real estate. The PREC exists only to provide the services of its controlling shareholder (you) to a real estate brokerage. This means that the PREC must have an agreement in place with a brokerage and cannot provide any services directly to the public or otherwise trade in real estate outside of the services provided to the brokerage. This includes receiving, directly or indirectly, any remuneration for trading in real estate, except from the brokerage that the PREC has an agreement with.
It is also very important, even if it seems convenient or expedient to do so, that the PREC never holds any money or property of a client, customer, or other person in connection with trading in real estate. All money and property should still be traded through the brokerage directly.
If your relationship with a brokerage comes to an end, for one reason or another, you must not provide your services through a PREC unless you sign a new agreement with another brokerage. It might seem easier to just use this corporation to form a new brokerage, or otherwise go out on your own, but a PREC must never be used in this way.
Differences from Other Professional Corporations
You may be familiar with the use of professional corporations in other contexts, but PRECs have some key differences that set them apart.
As mentioned above, a PREC cannot deal directly with the public. There needs to be an agreement in place with a brokerage to be able to trade in real estate. While a PREC allows you to receive compensation in your PREC rather than personally, this compensation has to come from a brokerage and not from any individual directly.
Another big change from other professional corporations, is that there is no option to have more than one real estate professional under one PREC. While doctors, dentists and physiotherapists have the option to combine in this way, a PREC is inherently personal and can only provide the services of one controlling shareholder to a brokerage.
Finally, the equity shares that see their value grow with the value of the PREC can currently only be held by the controlling shareholder and not by any family members or in trust for anyone else, although certain family members of the controlling shareholder can receive non-voting, non-equity shares of the PREC. In other professions there is a requirement only that the professional has total voting control, but for PRECs it is a step further and you cannot issue equity shares to anyone other than the real estate professional.
While there are restrictions on the use of PREC, there is a reason that they have come into existence. There are several financial and tax benefits of incorporating and operating as an incorporated professional. If you would like to learn more about these advantages, it is important to reach out to your accountant or other financial professional to get the appropriate advice.
If you have looked at the issue and determined that you would like to incorporate a PREC, do not hesitate to contact me or one of the other members of our corporate group and we will be happy to assist with the incorporation and organization of your PREC.
Associate – Business Law Groups
Disclaimer: This article is provided as an information resource. This article should not be relied upon to make decisions and is not intended to replace advice from a qualified legal professional. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship. Please note that this information is current only to the date of posting. The law is constantly changing and always evolving.