After successfully completing this topic, you will be able to
• list the business entities that can be registered as Florida brokerage firms,
• describe the advantages of each business entity, and
• describe the disadvantages of each business entity.
Business entities that may be registered as brokerage firms include sole proprietorships, general partnerships, limited partnerships, corporations, limited liability companies, and limited liability partnerships. A discussion of each follows.
A sole proprietorship is owned by one person. A real estate broker may do business using his or her name, or using a fictitious name (trade name) that has been registered with the DBPR. The sole proprietor is financially responsible for all debts or judgments.
General partnerships are created when two or more persons engage in business together without another form of ownership. There is no legal requirement that the agreement be written. The brokers must register the partnership with the DBPR.
Partners in a general partnership have unlimited personal liability for the debts of the partnership.
The partnership does not pay taxes, but it reports the net income of the partnership to the IRS. The partners show their prorata share of the income based on their ownership percentage and pay taxes only once, at the personal level.
All general partners who provide real estate services must have an active broker’s license. Other partners must be registered with the DBPR.
Neither sales associates nor broker associates may be partners in a real estate brokerage general partnership. (They may, however be partners in an investment partnership.)
Brokers who share office space must clearly separate their businesses. If they don’t, and appear to be partners to the public they may have created an unintentional quasi (ostensible) partnership. Each individual would then have unlimited personal liability for the acts or business debts of the other. The FREC will discipline brokers who have not clearly shown they are a separate entity with separate offices and signs.
Limited partnershipsallow limited liability to one class of investors (the limited partners). They are formed by filing a limited partnership agreement with the Secretary of State.
There must be at least one general partner and at least one limited partner. The general partners manage the day-to-day affairs of the business. The limited partners are “silent” partners. Limited partners must make an investment of cash or property, but may not provide any management services.
A limited partnership that provides brokerage services must register with the DBPR. At least one general partner must hold an active broker license. All general partners who perform real estate services must hold active brokers’ licenses. Other general partners who do not perform real estate services must registerwith the DBPR. Limited partners need not register with the DBPR.
Licensed sales associates or broker associates may not be general partners, but may be limited partners, like stockholders in a corporation.
A limited liability partnership should not be confused with a limited partnership. The “limited liability” means that a partner is responsible for his or her own acts, but not the negligent acts of another partner. The partners must file the name of the firm with the Florida Secretary of State, and include either the words “Registered Limited Liability Partnership” or (more commonly) “LLP” in the name.
A corporation is the same as a person in the eyes of the law. A corporation is formed by filing its charter with the Secretary of State. If the corporation is registered in Florida it is a domestic corporation. If registered in another state, it is a foreign corporation. Before the DBPR will register a Florida real estate brokerage corporation, the broker must provide proof it is authorized to do business in Florida.
Persons become stockholders by purchasing shares of the company. The corporation is liable for its own debts, but if it is unable to pay the debts, the shareholders do not have personal liability. A corporation may have perpetual existence.
Brokers who want to form a corporation should consider the income tax effects of this choice. C Corporations require shareholders to pay income taxes twice on corporate earnings; once at the corporate level, and again when the shareholders received dividends. If that feature is unattractive, the broker might file an election to be treated, for income tax purposes, as a small business corporation under Subchapter S of the income tax code. With an S corporation, the corporation does not pay taxes, and reports the net income of the corporation to the IRS. The shareholders show their prorata share of the income based on their stock ownership and pay taxes only once, at the personal level.
At least one of the officers in a brokerage firm must have an active broker license.
Any officers and directors who perform real estate services must be licensed as brokers. Other officers or directors who are not licensed must be registeredwith the Division of Real Estate.
A sales associate or broker associate may not be an officer or director, but may be a stockholder.
Most brokerage corporations are registered as for-profit corporations. While it’s possible that the corporation may not make a profit, it’s the intent that counts.
A corporation for profit may be dissolved by one of the following
• action of the stockholders,
• court order,
• failure to file an annual report, and
• failure to pay an annual report fee,
• but it will not be dissolved because of bankruptcy.
There are many purposes of a corporation not for profit. Examples include the American Red Cross and many trade associations. Some may be registered as real estate brokers, such as a Realtors® Association.
A limited liability company has the tax benefits of a partnership (paying taxes only at the individual level) and the limited liability of a corporation.
Brokers form a limited liability company by filing with the Florida Secretary of State. Brokers may register with the DBPR as a limited liability company.
Sales associates and broker associates may form professional corporations (P.A.), limited liability companies (LLC), or professional limited liability companies (PLLC). The name must be in their licensed name only.
Married licensees may not form a professional corporation for both persons. Each spouse should form an individual corporation through which they can be paid by their broker.
If the license of the only active broker of a corporation or partnership becomes void, the firm has 14 calendar days to replace the broker, or the corporate license will be canceled, and the sales associate’s licenses will become inactive. Licensees registered under the broker can become active again by finding a new broker.