Agents often ask me if they can get their commission paid directly to their LLC entity. The answer is no… or a complicated yes.
The Texas Real Estate Commission rules indicate that a broker is only allowed to pay a commission to a licensed agent or entity. So, in general, the answer is No. However, if it’s really important to you it is possible to license your entity which would allow for commissions to be paid directly to your LLC. However, it’s a complicated process with added expenses so you will want to consider that choice carefully.
This is route I chose when I got my license back in 2006. Several months after I got my real estate license I created my LLC, StepStone Realty, and immediately got it licensed as a Texas Real Estate brokerage. From my first-hand experience, I can tell you what to expect as well as the benefits and disadvantages of doing so.
First, the benefits.
- When you license your LLC it will give you the freedom to brand yourself separate from the brokerage. If you think some day you will want to start your own brokerage this will give you a head start.
- There may be some tax benefits to funnel income into an LLC versus receiving 1099’s for your licensed activities. Talk to your tax advisor about the potential savings as there is expense associated with this action.
- Depending on the agreement you have with the designated Broker for your LLC you may be able to recruit agents and dictate your own fee schedules since you are now the owner of the brokerage.
But, before you run to the Secretary of State to file for your new LLC, you should carefully consider the costs and risks associated.
- You will need a Designated Broker for your firm, someone like myself, who is willing to act as your designated broker and take on the risk of the activities of the LLC. They will want to be compensated for this so you are, essentially, still paying a broker fee. Furthermore, the designated broker will have to be added as a member of your LLC on the organization docs.
- Your licensing expenses will double as you will have to pay TREC fees and Board fees for both your brokerage license as well as your individual sales persons license. That’s not cheap and can add up!
- You will need to have an E&O insurance policy for your brokerage. TREC REQUIRES E&O if the designated broker owns less than 10% of the LLC. Costs for this vary depending on the level of activity but it could be anywhere from $800 to several thousands of dollars per year.
- You will be responsible for the business of the brokerage. If you are independent this won’t be too cumbersome but if you start adding agents it can get pretty involved.
- Other considerations include general liability insurance, developing a policy and procedure manual, additional tax return preparation for the LLC and potential tax disadvantages in the form of self-employment taxes.
I admit… I didn’t know what I was getting into when I decided to license StepStone Realty. The expenses were a surprise. However, at that time, an agent could earn a broker’s license after two years’ experience so I was able to transition out of this model in a shorter time frame than agents can do so these days. However, once I did get that broker’s license I was off and running much quicker than most agents who make the transition from sales agents to brokerage owner.
Ultimately, you should have a detailed discussion with your tax preparer about the benefits and drawbacks of licensing your LLC. They may have a better, and cheaper, suggestion on how you can funnel those commissions into your LLC without taking on the hassle of licensing your LLC. If you still want to do it… let’s talk! I’d love to help you build your business!