Licensing a Real Estate Broker LLC in Missouri
A limited liability company is like an insurance policy. It generally protects the LLC owner’s personal assets from claims against the business. Although an LLC cannot always protect real estate brokers and agents from personal liability in some situations, there are plenty of situations where operating a real estate brokerage business through an LLC does protect the personal assets of the broker. As such, it’s usually a good practice to operate a real estate brokerage business through an LLC.
Licensing a Real Estate Broker LLC
Licensing a Missouri real estate broker LLC is a two-step process. First, the LLC must be formed with the State of Missouri, which includes filing articles of organization with the secretary of state and drafting an operating agreement specific to a Missouri real estate association. (Even single owner LLCs need a written and signed operating agreement.) The LLC also must identify a registered agent and indicate whether the LLC is to be member managed or manager managed. The latter is typically preferred.
Fictitious Entities
Many real estate broker LLCs also own a fictitious entity name, typically referred to as a “dba”, which is used to market the brokerage business. The name of the fictitious entity must be registered with the secretary of state, and the real estate broker LLC may not use the name until the registration of the name is filed with the Missouri Real Estate Commission (MREC). A fictitious entity is not a legal entity. As such, the owner of the fictitious entity is liable for all of the actions done in the name of the fictitious entity.
License Application
After the LLC is formed, the broker must submit an application with the MREC for the LLC to be licensed as a real estate association. The certificate of organization of the LLC and the registration of the fictitious name owned by the LLC, if any, must be attached to the license application. The MREC charges a fee of $80.00 to license a Missouri LLC and $150.00 to license an LLC formed in another state.
Each real estate broker LLC must also appoint a designated broker, which must be an individual licensed as a broker, who will be responsible for the acts of the LLC and for all communications with the MREC in relation to the real estate broker LLC. The designated broker may either change his or her broker license to a broker-associate license or apply for an additional license as a broker-associate. Further, the designated broker must hold a comparable title with the real estate broker LLC, such as member or manager. Likewise, every other broker who will supervise the brokerage activities of the real estate broker LLC must obtain a broker-associate license.
Licensees who want to be affiliated with the real estate association, such as an independent contractor salesperson, must transfer their salesperson license to the real estate association. The salesperson will also enter into an independent contractor agreement with the real estate broker LLC, or the real estate broker LLC might hire the salesperson as an employee.
Policies and Procedures
The real estate broker LLC should have a comprehensive manual of its procedures and policies. This is critical when other licensees will be acting on behalf of the real estate broker LLC. Each licensee must sign a statement representing that they have carefully read the manual, that they understood all of the policies and procedure of the company, and that they will adhere to each of the policies and procedures. When properly used, such manual can serve as a defense for the real estate broker LLC in the event the LLC is sued in relation to the conduct of a licensee.
S Corporation
The real estate broker LLC can also elect to be taxed as an S corporation. Making such election does not change the legal status of the LLC. It remains an LLC after the election is granted by the IRS. However, for purposes of the election, the real estate broker LLC must appoint an officer, it must issue shares of stock to its owners, and the tax liabilities must be allocated to each owner in proportion to the shares owned. Subchapter S includes many other laws relating to S corporations, many of which will not impact a real estate broker LLC owned by just one person. However, brokers should seek legal advice prior to making the election.
Avoiding some of the self-employment tax of 15.3% on earned income is the main reason to make the S corporation election. S corporation owners can receive income from the LLC as either a wage or as a dividend distribution. S corporation owners must pay the self-employment tax on wages received from the S corporation, but they do not pay the self-employment tax on distributions. However, S corporation owners cannot receive this tax break until they first receive a “reasonable compensation” wage from the S corporation. The IRS does not provide a formula to calculate reasonable compensation. However, reasonable compensation is loosely determined by the U.S. Tax Court to be the amount the real estate broker LLC owner would have to pay someone with their skill and experience to do the job that the owner performs for the S corporation. Anything in excess of that amount generally may be received as a distribution free of the self-employment tax.
The S corporation election must be made with the IRS within two months and 15 days from the date on which the LLC is formed with the secretary of state in order for the election to be effective for the year in which the LLC was formed. The election will not be effective until the year after it is made if the election is filed with the IRS after the two months and 15 days. The IRS must approve the election, which typically takes about 60 days. The real estate broker LLC operating agreement must then be amended after the election is confirmed by the IRS.
Professional Corporation
Only Missouri broker-salesperson licensees and salesperson licensees may operate their real estate licensee business through a professional corporation. A professional corporation provides the liability protection of a corporation, but the internal revenue code imposes a flat rate of 35% on taxable income earned by a professional corporation.
Unlike an LLC, the professional corporation is liable for the payment of this tax. Plus, the owner of the professional corporation, the licensee, must pay tax, at the owner’s individual tax rate, on dividend distributions made to them by the professional corporation. However, like an LLC, a professional corporation can elect to be taxed as an S corporation. In that case, all taxable income will pass through to the owner of the professional corporation, and the owner will pay no self-employment tax on income received from the professional corporation as a dividend distribution. Licensees should consult with an attorney or tax advisor familiar with these tax laws and regulations before deciding to operate their business through a professional corporation or through a professional corporation taxed as an S corporation.
Other Entities
Finally, under Missouri law, real estate licensees may also operate their real estate businesses through either a corporation or a partnership. Like an LLC, a corporation may elect to be taxed as an S corporation, thereby avoiding the double taxation issue discussed above, but the formalities required of a corporation under Missouri law often make this an unattractive option. Additionally, a partnership is in many respects like an LLC, however, the latter often provides better asset protection. Plus, the general partner of a limited partnership must operate as an LLC or corporation to avoid personal liability. As such, few businesses, including real estate licensee businesses, are formed as a corporation or as a limited partnership.
Michael Sewell, JD, MBA has formed more than 100 LLCs, including traditional, series, IRA, real estate brokerage, and S corporation. He has also litigated more than 100 lawsuits in federal, state, administrative, and municipal courts since 2005, involving contracts, businesses, and real estate. Michael additionally provides advice to businesses on a wide range of matters, including taxation.
Please contact Michael Sewell for an initial consultation. (314) 942-3232 | michael@sewelllaw.net.
This article is for general informational purposes only. This information is not intended as legal advice. You should consult an attorney regarding how this information might apply to your specific circumstances.
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