We sat down with Monica Goyal, Lawyer and Director of Legal Innovation at Caravel Law, to talk about what you need to know before setting up a Personal Real Estate Corporations (PREC).
Last year, effective October 1, 2020, real estate agents and brokers in Ontario could incorporate Personal Real Estate Corporations (PREC) to receive payment for their services from their brokerages.
Ontario joined several other provinces that already allow PRECs, including British Columbia, Alberta, Saskatchewan, Manitoba, Quebec and Nova Scotia.
Real estate agents who decide to incorporate with a PREC can take advantage of some great benefits, including financial incentives like tax deferrals.
While a PREC might not be the right decision for every real estate professional, with the right legal support and an awareness of some of the specific features of a PREC, you can reap the benefits of forming a corporate entity without a ton of added work and stress.
What’s unique about a PREC?
While there is standard documentation for incorporating general professional services businesses, legal documents for a personal real estate corporation are different and use very specific language in their articles of incorporation.
With a PREC, the only activity the corporation can take part in is billing the brokerage to receive payment (a real estate professional must be working with a brokerage to incorporate).
Under a PREC, you can’t operate any other type of business, buy and sell property, or advertise through the corporation, among other restrictions. An experienced lawyer can explain the key differences of a PREC and ensure your corporation is operating legally.
You also need to ensure you have the correct legal agreements set up with your real estate brokerage and that you are properly following all the terms set out in the contract. Your lawyer can explain the agreement to you in detail and ensure you’re aware of the contract’s terms and conditions.
What are the upfront decisions you’ll need to make?
Do you know how your business should be structured? Who the shareholders should be? What shares they can hold? Who your directors and officers should be?
If you’re not sure or need help, the right lawyer can provide legal counsel to help you answer these questions.
Another important decision you’ll have to make is choosing a name for your corporation.
There are rules that need to be followed when selecting a name, and it’s best to steer clear of any that are overly clever, funny or unclear. For a PREC, it’s best to go with ‘Your first name/first initial, your last name, Professional Real Estate Corporation.’ A lawyer can help advise you on appropriate names that are likely to be approved.
It’s tempting to try to use an accountant (or online incorporation services) for the entire PREC process, but these options won’t provide you with the full scope of legal advice and expertise you need to set up your corporation correctly.
What are the long-term obligations you should be aware of?
There are up-front legal and accountancy fees to be aware of and on-going annual incorporation fees that need to be paid. This includes corporate maintenance fees, tax filing costs, bookkeeping expenses, etc. Speak with your accountant to see if it makes financial sense for your real estate business.
One final point to note is that incorporating involves a lot of paperwork. It’s tough to keep track of every document, make updates and maintain communications in one centralized location. To streamline this process, legal software programs can help keep all your records organized and easily accessible. Talk to your legal team to see if they use these digital tools to help their clients incorporate.
Need help setting up your Personal Real Estate Corporation? Caravel Law employs qualified lawyers who specialize in PRECs. Get in touch with our team today to find out more.
The information provided in this article is not intended to be legal advice. Many factors unknown to us may affect the applicability of this content to your particular circumstances.