Directing Real Estate Commissions to Entities
Agents frequently approach me with questions about whether they are allowed to request that their commission be paid to their own corporation or limited liability company (LLC). This topic was the focal point of a Department of Real Estate (DRE) Bulletin back in 2000, addressing the complexities and legal considerations surrounding the compensation of salespersons in the real estate sector. Specifically, the discussion revolves around the permissibility, under Real Estate Law, of a real estate broker directing a salesperson's commission to a corporation wholly owned by the salesperson or to another specified entity. Central to this debate is Section 10137 of the Real Estate Law, which prohibits brokers from compensating anyone for performing licensed real estate activities unless the recipient is a licensed broker or a salesperson licensed under the compensating broker.
The DRE's interpretation of Section 10137 clarified that brokers could indeed direct commission payments to a salesperson’s corporation or LLC following the completion of a transaction that earns a commission. This process necessitates that the broker provides written instructions to the escrow, directing that the salesperson's share of the commission be paid to their corporation or LLC. Each commission-earning transaction must be accompanied by such a directive from the broker.
Per the DRE, the primary goal of Section 10137 is twofold: firstly, to deter brokers from employing or compensating unlicensed individuals for conducting activities that require a real estate license; and secondly, to ensure that brokers do not compensate salespersons who are not licensed under them for performing licensable activities. The DRE's stance allows for the redirection of commissions to a salesperson's corporation or LLC without contravening these objectives, as long as the salesperson maintains equitable ownership over their earnings and manages the direction of their disbursement.
However, brokers are urged to proceed with caution. Should the corporation or LLC receiving the commission engage in licensed real estate activities, the broker could be in breach of the law and subject to disciplinary actions. This accentuates the importance for brokers to meticulously issue specific instructions for each commission payment and to not delegate this critical responsibility.
The DRE's guidance provides a legal framework for brokers to comply with the law while accommodating the preferences of their salespersons regarding the management of their commissions. It also underscores the potential complexities and risks involved in this process. Brokers are recommended to exercise due diligence and, if necessary, seek advice from legal or accounting professionals to navigate these issues effectively. While the DRE does not offer tax advice, it suggests that real estate professionals consult with experts in legal or financial fields to ensure compliance with both the legal and fiscal aspects of commission payments.