Confused about licensing and flipping (TX)

13 Replies

Hi all,

So I'm preparing to rehab houses in the next year. I'm currently enrolled & working on the courses to satisfy educational requirements to be a RE salesperson in Texas.

In one course, it stated that a business entity must be licensed as a broker. So my question is, I thought salespersons working under a broker were able to incorporate bc they were like independent contractors under the broker? Is this wrong?

Also, I was going to flip within the entity (with myself doing the deal acting as my own sellers agent) and form a separate LLC for any non-flip-related RE commissions on the side. Would I not be able to do that in Texas without first being licensed as a broker???

This is rocking my grandmaster plan, and now I'm confused.

Help! 

(also @j scott bc your flipping book is my bible and why I'm getting my license, but didn't see this issue addressed)

(EDIT: for some reason i couldn't tag.)

I don't know anything about TX real estate law, but my guess is that this is just saying that IF you were going to get a broker's license (not a salesperson's license), you would be required to have a business entity hold that license for you.  

But, my guess is that, as a salesperson, it's up to you if you want to work under a broker as an individual or as a business.  In practice (in my experience), the only time that it matters whether you work under the broker as an individual or a business is when it comes time to pay costs or receive commissions -- will the broker pay/get-paid from you personally or from a business account?

Does that answer your question?

Wow thanks! Talk about a quick response!

Here is the exact language from the course I'm currently working on:

"Any type of business entity that engages in real estate brokerage and that is required to be required to do business in the state of Texas with the Secretary of the State is required to be licensed as a broker.

This includes corporations, limited liability companies, and partnerships.

A business entity that receives compensation on behalf of a license holder is required to be licensed as a broker. [do they mean commissions??]

To be eligible for a broker’s license, the business must identify an individual broker, who must be licensed as a broker, as the designated person for the company.

If the business is a corporation, the designated person must be an officer of the corporation.

If the business is a limited liability company, the designated person must be a manager of the company.

If the business is a partnership, the designated person must be a general partner."

*****

Also, this goes against what I read from you and pretty much all the info on the BP blog posts I scoured, but our accountant insisted I form a C Corp for flipping and a separate sub LLC under its umbrella for my RE commissions. My husband and his family own a ranch and lots of LLCs within, and the attorney handles all the dealings with that, so he wants to make sure all my RE stuff is separate... BUT though he has a lot of experience with their tax situation and trust matters, he doesn't with flipping/real estate investing. So I've spent HOURS trying to figure out the best entity before I open our business account and deposit the money for the first house and I'm terrified I'll choose the wrong one.

Sorry this was kinda TL;DR but I have spend hours researching this and I'm at a loss.

What you wrote reads as specifically relating to brokers, not salespeople.  I think it's safe to say that none of that applies to you...

As for your business entity for flipping, I would never question your accountant.  But, that doesn't mean you shouldn't...  :-)

Seriously though, ask him why he recommends that structure, and perhaps ask one or two others.  Without knowing your specific situation (and without my having any formal education on the subject), I certainly don't have any reason to question your accountant.

@Sarah T.

A broker does not have to be an entity…he/she can simply be an individual broker.

If a broker forms an entity, the entity must be licensed to perform brokerage services.

A salesperson may own a brokerage but the brokerage must still have a broker of record. The broker doesn’t have to be you, but you must have a broker who is willing to accept that responsibility.

The law you're referencing is aimed at "a business that Acts As A Brokerage", and has no bearing on your flipping/investment entity since it's not working as a brokerage. As far as your "agent" entity, a corporation may, or may not, be allowed. Most agents here will use either a PA or an LLC. But, I'm pretty sure that LLC shouldn't be owned by/"under the umbrella" of another corp. It will be fairly quick to set up so you could wait and ask potential brokers, or just call the TX real estate commission.

Originally posted by @Guy Gimenez :

@Sarah T.

A salesperson may own a brokerage but the brokerage must still have a broker of record. The broker doesn’t have to be you, but you must have a broker who is willing to accept that responsibility.

Thanks! This is informative. So if a salesperson forms an entity while working under a broker, does this mean that the entity must have a "broker of record" within it? Does that mean the broker, assuming he/she accepts the responsibly, becomes an employee/shareholder/owner (depending on entity) of the company? And if that is indeed the case in Texas, and a salesperson does not want to give over any interest in their entity, would it make sense then to go for a broker's license after working as a salesperson for 2 years and THEN incorporate?

(EDIT: I'm asking this because a comment above said the flipping company wouldn't be subject to these requirements, and that's fine, but what about the fact that I'm also acting as my own agent buying the property and I have to pay fees from that to the brokerage? Would that money change things? I'm so confused.)

@J Scott: Thanks!! I reread it and that's how it sounded to me, too, I think you're right. Also, good idea, I think I"m going to set un an appointment with an accountant here that works primarily with real estate investors to get a second opinion about structuring my business.

Originally posted by @Sarah T. :
Originally posted by @Guy Gimenez:

@Sarah T.

A salesperson may own a brokerage but the brokerage must still have a broker of record. The broker doesn’t have to be you, but you must have a broker who is willing to accept that responsibility.

Thanks! This is informative. So if a salesperson forms an entity while working under a broker, does this mean that the entity must have a "broker of record" within it? Does that mean the broker, assuming he/she accepts the responsibly, becomes an employee/shareholder/owner (depending on entity) of the company? And if that is indeed the case in Texas, and a salesperson does not want to give over any interest in their entity, would it make sense then to go for a broker's license after working as a salesperson for 2 years and THEN incorporate?


If the salesperson (you) is not acting in the capacity of a broker (you're not), whether you form a business entity for your salespersons business is absolutely unrelated to the broker and how the broker is managing/organizing their business.  In other words, unless you want to own a brokerage or be a broker, none of what you discussed in earlier posts is relevant to you.  

You are merely an independent contractor of the broker, and you can set up your business any way you see fit.  You're not a broker and you don't own the brokerage, so you don't need a broker's license and you don't need a "broker of record" on your business.

It's sorta like a chef working for a restaurant owner.  As the chef, you're not responsible for the restaurant license, the liquor license and all the red-tape that comes along with owning the restaurant.  You are hired to work on behalf of the restaurant owner, and he deals with all the bureaucratic crap.  That's what the broker does...while you do the day-to-day work like the chef.

@Sarah T.

1.A salesperson may form an entity and just hire a broker to be the broker of record / managing broker. For the life of me, I don't know why a broker would do it, but there are many who will. The liability is just too great for my comfort level. However, the entity will still have to be licensed in order to offer brokerage services but you can have sole ownership (one party LLC).

2.You’re confusing representation issues and principal issues.  As a principal, you will disclose your licensee status and make it clear you do not represent the other party. I prefer to include other disclaimers, waivers, disclosures as well but it’s only due to my inherent dislike of potential liability.

If you’re buying and selling through an entity, you don’t have to be licensed as you’re a principal in the transaction (or your entity is a principal) and principal’s in a transaction.  Only when you represent another party do you fall into the licensing requirements.

3.Personally, I recommend you simply set up whatever entity you desire for your investment property (get some legal advice on Series LLC's) and then just find an investor minded broker to work under for your representation deals instead of forming another entity purely for brokerage activities.

@Sarah T.

Not being a lawyer or an accountant, please take this opinion as just that.

You may be confused by attempting to use the same entity for both you as the RE Agent and you as the RE Investor. While not strictly necessary, if I were in this scenario I would have two separate entities. The Texas SOS site says you may use an LLC as a licensed Agent. This should not need a Broker of Record as this entity would never be the Broker on a deal and would just be the payee of the actual broker when you earn commissions.

Your RE Investor entity will be the purchaser / seller on specific real estate transactions and thus as it has an ownership interest is not involved in the transaction as a representative of another person or entity and does not need a real estate license or Broker of Record. (Some may interpret corporation law to mean that you as an individual could not perform the search for and marketing of real estate for this Investor entity unless you are a licensed agent or a W2 employee. I believe this less likely in an LLC than with a standard corporation.)

Net when you are working as an agent, even for your own investment, your income, expenses and liability belong to your agent LLC. and when you are owning, rehabbing, renting or exiting the investment properties, these belong in the investment LLC.

A long winded way of saying you need to get professional help to do this correctly.

I've just gone through the process of meeting with attorney and CPA regarding LLC/c corp setup for being an investor/agent. I'm in California so keep that I mind.

You can absolutely keep the two separate. The only association is that you have to disclose you're an agent when involved in a deal as a principle. In California, the broker you are working under can pay your commission to your corporation if you choose. However, if their is more than one member in the LLC then all must be licensed agents in California. An agent can own a brokerage as long as it's under another brokers license or a partnership.

I'm having to setup a c corp for my special situation unfortunately. Wish I could do an LLC but it won't work for me. Good luck.

Commissions cant be paid to unlicensed parties. If you perform brokerage services, you must be licensed except as a principal. If your company performs brokerage activities, it must be licensed. If you're not a broker or don't hire one on your behalf, you can't buy,  sell, or advertise real property for another person.

Thank you everyone. Here's what I gathered from all this info:

1. Get RE salesperson license. Find investor friendly broker to sponsor me.

2. Talk to a RE attorney about biz entity type

3. Incorporate for flipping biz. LLC for commissions.

...and this is all legal and ok to do in TX. Pretty much the impression I was under before I posted, the course wording just made me doubt myself. Thanks all!!