Should I hold by broker license in an LLC? (Chicago resident)

Question

I am fairly new here but have not yet had a chance for a proper introduction. For now I enjoy reading everything as it's full of great advice thanks to everyone's input. I do however have a question whether it's feasible for a new licensee to hold a Illinois real estate broker license in an LLC. I would elect to be taxed as an S corp and am mainly interested in the limited liability aspect and eventually having the LLC hold my managing broker license. Any thoughts on this from local brokers is appreciated!

Kimberly H. · Answer

I talked to one lawyer in Illinois about this, he also has his own Real Estate Brokerage company that he is managing broker of, he said he didn't see any point in setting up an LLC with regards to liability for a real estate brokerage, and he is the person I would be hiring to set the LLC up so he "lost" a sale telling me that.  Said any issues that came up would go to the broker personally anyway and not the LLC. His RE brokerage company is not held in an entity, just a sole proprietorship with a DBA for the name.  He suggested E&O insurance was the only thing that would provide additional protection. I haven't talked to any other attorneys about this and would be curious to know their opinions, and if they did want to sell me an LLC I would be asking them to prove the other attorney wrong; show me case law where an LLC did protect a broker. I didn't want to incur the expenses of the LLC and the additional costs of setting it up with IDFPR if there wasn't a good reason too.

Nicole R. · Answer

@Damian S.

In Illinois, an LLC can hold a broker's license. Oddly enough, it is called a limited liability company license.  You can find the procedures for filing an application for a business entity/LLC license in Section 5-15 of the Real Estate License Act of 200 and in 1450.600 of the Rules for Real Estate License Act of 2000.

As the owner of the LLC, you would also need your own broker's license, and I believe you'd need someone with a managing broker's license as well until you were able to act as your own managing broker (after 2 years of actively practicing real estate).

Hope that is helpful to you!

Ronald Williams · Answer

Hi Damian,

I'm a real estate agent in Pennsylvania and have recently learned about "Qualified Associations". This is a legal form specifically for real estate agents that allows us to form a company which will receive our commissions from our broker on our behave and give us the opportunity to get many of the tax and legal advantages that goes along with running a business.

Go to: http://www.macdonaldillig.com/real-estate-licensin...

to learn more about it.

The information here is for PA real estate agents. I hope that your state has instituted rules that will allow you to do the same.

Good Luck. I hope this helps.

Matthew Kreitzer · Answer

Well, there isn't really a vehicle in my state for allowing a business entity to hold an individual's license as a corporate asset. I've never heard of such a thing being done before, so I don't necessarily agree with what the original poster is proposing.

However, I do think that a person could get some extra protections, in my state, as a broker operating as an employee of an LLC as opposed to a DBA. Some of the things that spring to mind is if the broker accidentally misrepresents some material fact to the contracting parties which, if known to the contracting parties, they would not have closed the deal. For instance, lets say broker, for some odd reason, makes assurances as to title or some physical aspect of the property. Contracting party, on reliance, closes on the deal and faces some related damages based on that reliance. Broker's personal assets wouldn't be protected against exemplary damages.

I could give specific examples, but I think they would most likely cross into the realm of guess work and fancy. Do I think a broker is necessarily going to be subject to a negligence dispute? No, and in most instances a broker is unlikely to be subject to a negligence dispute. Do I think a broker could be subject to a negligence dispute by misplaced or misused verbage? Sure.

Sarah Ziehr · Answer

The E&O protects you as an individual.

The LLC protects your assets if you own property as an investor.

Matthew Kreitzer · Answer

I will restrict my comments to the state in which I practice, but I can imagine any number of law suits associated with acting as a broker based on theories of negligence. Perhaps Illinois laws are different with respect to negligence, or perhaps you are engaging in activities that protect you in your individual case, but I would recommend that anyone who is thinking about engaging in any business activities should seek out their own, personal attorney to discuss the types of business structures one should use based on the unique business arrangements they have planned.

Damian S. · Answer

Nicole R.

That's what I thought, thank you Nicole! I spoke to a managing broker and my attorney - the broker is set up with an S Corp and my attorney also recommended it. Even with electing to be taxed as an S Corp I think going the LLC route is cost prohibitive since you get similar benefits. Unless you have any other thoughts on this.

Jeff B. · Answer

Do a Cost / Benefit analysis

two columns;  one pro, other con.  Fold vertically and work on one at a time.

Matthew Kreitzer · Answer

In my own jurisdiction, an undercapitalized claim is examined in light of what kind of operating expenses an LLC ought to have to cover their daily operations costs. So honestly, it would depend on the types of expenses and overhead incurred on a regular basis by the LLC in relation to how much is in their bank account. It isn't the number alone that matters, but taking assets and comparing to expenses that matter. This law is almost assuredly changed or modified by local common law, and this statement should not be taken to apply to anything other than Virginia, and even in Virginia, you should seek out an attorney if you are facing this issue. Do not act on this.

Kimberly H. · Answer

@Matthew Kreitzer thanks for responding.  So let's say there is a single member LLC that is the brokerage/broker. And the LLC isn't funded or capitalized; it owns no assets other than a checking account with a minimum balance of $1500 in it. Would the corporate veil in that instance be pierced in a lawsuit by proving that the LLC isn't sufficiently funded/capitalized...and then wind up at the broker personally anyway? I've come across the undercapitized veil piercing scenario in reading about LLCs online but don't know how prevalent that really is.

Should I hold by broker license in an LLC? (Chicago resident)

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