Now that tax time is upon us, many REALTOR® members have been consulting with their tax advisors on how to manage their personal tax situation. The GBAR Brokerage Counseling Line has received many calls from members who have been advised to form a LLC to receive the agent’s commissions. Although the tax implications and rationale surrounding the formation of a legal entity to collect commission payments requires careful consideration and should be done only after consultation with both legal and tax professionals, the formation of an LLC could weigh in favor of supporting the independent contractor status of the REALTOR® member if such status were to be challenged by a regulatory or tax authority.
While the short answer is that it is permissible for a Massachusetts brokerage firm to pay commissions to a LLC, there are important laws and regulations in the Commonwealth that must be followed in order to do so.
The licensing of a corporation is governed by Massachusetts General Laws Chapter 112, Section 87UU. A license will only be issued to a corporation if the corporation designates a representative to obtain the license and that representative already holds a broker’s license as an individual. Further, the statute expressly prohibits the issuance of a salesperson’s license to a corporation.
The issuance of broker’s licenses is further regulated by 254 CMR 2.11, which states:
•No licensee may engage in the business of real estate brokering in a corporation, limited liability company (LLC), partnership, limited liability partnership (LLP), association or society unless the entity is licensed by the Board.
•No broker’s license shall issue to a corporation, LLC, partnership, LLP, association or society unless an officer in such corporation, society or association or partner in a partnership is a licensed broker in the Commonwealth and designated as the broker of record for the entity. The broker of record must be currently licensed at all times, otherwise the license of the entity shall cease.
Fees and commissions earned from a real estate transaction may only be paid to a licensed salesperson or broker. As such, any payments to an unlicensed LLC (or other unlicensed entity) are impermissible. If you wish to take advantage of any potential benefits to corporations under tax reform, you must act within the bounds of Massachusetts laws and regulations and should also be aware of the additional costs for licensure of the LLC, as well as any annual reporting and filing requirements with the Secretary of State of the Commonwealth of Massachusetts.