Texas’s real estate landscape is undergoing a dynamic shift, offering exciting possibilities for a Texas real estate broker seeking innovative ways to structure their compensation.
As of January 2024, the Texas Real Estate Commission (TREC) introduced the option for business entity registration, allowing licensed brokers to receive compensation through registered entities like LLCs and S Corporations.
Below, we explore the key differences between business entity registration and a business entity real estate broker license, including the eligibility criteria and ownership requirements. We also answer some frequently asked questions.
Understanding the Options: Registration vs. Licensing
Previously, brokers who wanted to receive compensation through a business entity required a dedicated business entity real estate broker license. This license required additional fees, specific qualifications, and separate renewal processes.
The new business entity registration is a more cost-effective and streamlined process. Eligible business entities can now register with TREC to receive compensation through the entity, eliminating the need for a separate license.
TREC provides a helpful Business Entity Comparison Chart outlining the main distinctions between licensure and registration.
Business Entity Real Estate Broker License
A business entity real estate broker license allows a corporation, LLC, partnership, or other legal entity to act as a real estate broker in Texas.
This license allows the entity to perform any brokerage activity that an individual broker can perform, such as listing properties, representing buyers or sellers, negotiating contracts, and collecting commissions. The designated broker supervises the sponsored sales agents and ensures compliance with TREC rules.
Eligibility Criteria for Licensure
To qualify for a business entity license, the following is required:
- Designated broker. At least one designated broker must meet TREC’s educational and experience standards, ensuring compliance with industry regulations and holding an active Texas real estate broker license.
- Physical office. The entity must maintain a physical office within Texas, equipped to handle real estate transactions and keep proper records. This demonstrates professionalism and facilitates communication with clients and regulatory bodies.
- Errors & Omissions Insurance. The entity must secure errors and omissions insurance coverage to protect against potential liabilities arising from real estate activities. This safeguard mitigates financial risks, and fosters trust with clients.
For a business entity real estate broker license, the designated broker must be a sole proprietor, partner, or officer with at least a 20% ownership stake.
Business Entity Registration
A registered LLC or S-Corp can receive compensation on behalf of its owner-license holders without having a designated broker or errors and omissions insurance coverage. However, the registered entity cannot perform any other brokerage activity and must comply with TREC rules regarding advertising, recordkeeping, and trust accounts.
Eligibility Criteria for Registration
To qualify for registration, the business entity must meet the following criteria:
- The entity must be an LLC or S-Corporation. Other business structures, like partnerships, are not currently eligible.
- The entity must be 51% owned by a licensed Texas real estate broker. This individual will ensure the entity complies with TREC rules and regulations.
- The entity cannot engage in any other real estate brokerage activities. Its sole purpose is to receive compensation on behalf of the licensed broker.
Consulting a qualified Texas business attorney is recommended to ensure you navigate the process smoothly and comply with all TREC regulations.
Frequently Asked Questions
Can I Register an Existing Business Entity?
Yes, existing LLCs and S-Corporations can be registered with TREC, provided they meet the eligibility requirements.
What Happens If I Transition from A Business Entity License to Registration?
You will need to submit a new application and pay the registration fee. You must also notify TREC in writing that you are surrendering your business entity real estate broker license and provide proof that you have canceled your errors and omissions insurance coverage. TREC provides some guidance on the transition process, ensuring a smooth shift with minimal disruption.
Are There Any Ongoing Reporting Requirements for Registered Entities?
Registered entities may have specific reporting requirements outlined by TREC. Consulting with a legal professional can ensure compliance with these regulations.
Does Registration Impact the Broker’s License Obligations?
The broker remains individually responsible for adhering to all TREC rules and regulations for license holders. It is important to note that registering an existing business entity with TREC does not exempt the broker from their individual responsibilities as a license holder. Brokers must understand and fulfill their obligations to maintain their license status.
Are There Rules for Naming an Entity?
TREC does not have requirements about the name of your LLC or S-Corp. However, entity names need to follow Texas business naming rules, which are established by the Texas Secretary of State. These rules require avoiding misleading names, using specific designations for certain business types, and ensuring name availability.
It’s important to note that registered entities cannot advertise directly to the public. This means they cannot use their names to solicit clients or promote their brokerage services.
What Are the Tax Implications of Registering a Business Entity?
Tax implications vary depending on the chosen entity structure. Consulting a Texas tax advisor is recommended to understand the specific tax consequences.
What Happens If I Violate the Terms of Registration?
Violations of registration requirements can lead to penalties, including potential revocation of registration and disciplinary action.
An experienced Texas business attorney can provide invaluable guidance throughout the process, ensuring compliance with regulations, addressing specific questions, and safeguarding your interests.
Massingill: Your Trusted Partner in Texas Business Law
At Massingill, we understand the evolving landscape of Texas real estate and the impact of the new business entity registration option. Our team of experienced business lawyers has the knowledge and expertise to guide you through this process confidently and efficiently. We offer comprehensive legal services to help you:
- Evaluate your eligibility and choose the most suitable option for your needs.
- Navigate the registration process efficiently and ensure compliance.
- Address any complex legal issues related to your business entity.
With a focus on clear communication and personalized attention, we help you to make informed decisions and achieve your business goals. Don’t let legal complexities hinder your success. Focus on what you do best – growing your business – while we handle the legalities.
Contact Massingill today and let us help you navigate the exciting new opportunities in Texas real estate.
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Joshua Massingill
Joshua Massingill is an attorney practicing in Austin, Texas. He serves on the Texas State Bar’s Law Practice Management Committee, the Leander Educational Excellence Foundation (LEEF) Board of Directors, and the Success-Werx Board of Advisors. He mentors young entrepreneurs in Leander ISD’s INCubatorEDU program and is active in his church.
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