Recent calls to the WRA Legal Hotline have discussed brokers providing services in the name of entities that are not properly credentialed and brokers asked to pay commissions to unlicensed individuals or entities. Therefore, this month’s hotline article serves as a primer and reminder about how individuals are licensed and how business entities are created and licensed. The conversation will also include information about the use of trade names.
Type of licenses
What are the different real estate licenses available from the Department of Safety and Professional Services (DSPS) and the Real Estate Examining Board (REEB)?
The REEB grants licenses to individuals as either a broker or salesperson. As of December 2016, the REEB no longer issues timeshare licenses. The REEB also issues real estate business entity licenses to business entities. To obtain a business entity license, there needs to be an individual with a broker’s license to be the business representative of the entity.
Does an individual holding a broker’s license have to have an entity to practice real estate?
No. An individual with a broker’s license may engage in real estate practice as a sole proprietor. According to the recent Wis. Stat. Chap. 452 changes, the definition of “firm” includes a broker practicing as a sole proprietor or with a licensed business entity. It is a business decision for a broker to create a separate entity, for example an LLC or corporation, to provide brokerage services. When a broker creates an entity, such as an LLC or corporation, the business entity needs to obtain a broker’s license from the REEB.
Why use an entity?
There are many reasons for a broker to create a separate legal entity. One often-cited reason is to limit claims to the assets of the entity and shield the broker from personal liability in the event of debts or litigation arising out of the business. The proactive broker may create an entity for purposes of estate planning and asset management. An entity creates a business identity beyond the individual owner and will exist beyond the life of the broker. Having a separate legal entity also affects taxes.
Which entity should a licensee create?
That is a perfect question to discuss with legal counsel. Making such a determination should be an educated decision made with intention and understanding of the implications. In anticipation of working with counsel, the licensee may find it helpful to create a business plan. The licensee should identify goals, risks, costs, maintenance, tax implications and then make a determination within that context. The right answer is “CYA and CYA: Call Your Attorney and Call Your Accountant.”
Department of Financial Institutions and the DSPS
An individual considering creation of an LLC or a corporation may review to the Wisconsin Department of Financial Institutions (DFI) at www.wdfi.org. Once an entity is formed, for example an LLC, the entity must also apply for a Real Estate Broker Business Entity license with the Real Estate Examining Board at dsps.wi.gov/Licenses-Permits/RealEstateBusinessEntity/REBEforms.
Can a person with a salesperson's license create an LLC or other legal entity? Can that LLC become a licensed real estate broker?
Yes and no. An individual with a salesperson’s license may create an LLC. However, the individual with only a salesperson’s license cannot independently obtain a real estate broker’s license for the entity. According to Wisconsin law, for an entity to obtain a real estate broker business entity license, there needs to be an individual with a broker’s license to be the business representative.
Advertising and trade names
What is considered a trade name or a “DBA”?
As the administrative code indicates, “‘Trade name’ means the name other than the name appearing on the license, under which the licensed individual broker or a licensed broker business entity advertises or does business.” Any broker doing business in a name not on the license needs to file a trade name with the DSPS.
How does the broker go about filing a trade name or a DBA with the DSPS?
The DSPS does not have a specific form to file a trade name. The licensee may notify the DSPS in writing either by mail, email or fax. Contact information is available at www.dsps.wi.gov. Licensees may use the licensee lookup at app.wi.gov/licensesearch to review what, if any, trade names have been filed. The licensee lookup is a valuable tool for a broker to check the credentials of licensees associated with the firm. Broker supervision requires brokers to ensure each licensee holds a valid license, when associating with the firm and at the beginning of each biennial licensure period.
Can a real estate licensee, who is associated with a firm, advertise with the licensee's own name?
The general rule is a licensee associated with a firm is required to advertise in the name of the firm, per Wis. Admin. Code § REEB 24.04(2). The licensee must advertise in the name on the firm’s real estate license, or in a trade name filed by the firm with the DSPS. There are exceptions for rental property owned by the licensee or the occasional sale of property owned by the licensee when the licensee identifies himself or herself as a licensee in the advertisement.
As for other specific requirements for advertising, the licensee may refer to company policies and procedures. Advertising rules apply to any method of communication including print and electronic media as well as on social media sites.
For more information about advertising, see WRA Legal Updates for October 2015, “Real Estate Advertising Methods,” at www.wra.org/LU1510 and August 2015, “Real Estate Advertising Content,” at www.wra.org/LU1508.
Associated with firm
When a licensee is associated with a firm, does the firm hold both the individual and the licensed broker business license?
If an entity is formed and a real estate business entity license is acquired, then the individual’s license and the entity license may be held by the brokerage firm. The individual licensee may review company policy to determine how the firm wants the individual and entity licenses held.
The independent contractor agreement may be modified to address the formation, licensure and payments made to the entity.
Commissions
Who can receive commissions or referrals?
According to Wis. Stat. Chap. 452.19, the firm may only pay commission to a Wisconsin licensee, either an individual or a real estate business entity licensed with the DSPS.
Wis. Stat. 452.19 Fees and commissions. (1) No licensee may pay a fee or a commission or any part thereof for performing any act specified in this chapter or as compensation for a referral or as a finder's fee to any person who is not licensed under this chapter or who is not regularly and lawfully engaged in the real estate brokerage business in another state, a territory or possession of the United States, or a foreign country.
The licensee, who has a salesperson’s license, created a single-member LLC with the DFI. The LLC is not licensed with the DSPS as a real estate broker business entity because the member has only a salesperson’s license. Can the broker pay the agent’s LLC?
Not directly because the agent’s LLC is not licensed. The statute does not, however, prohibit a licensee from assigning the receipt of compensation. The licensee could, preferably in writing, request the firm make the payment to the unlicensed LLC. The licensee and firm are advised to consult with tax consultants and other qualified experts as appropriate for the tax implications of such an assignment.
When a salesperson or a broker is associated with a firm, can the agent or broker be paid a commission directly from a client, or does commission have to be paid to the firm?
According to the law, when a licensee is associated with a firm, compensation — whether commission or referral fee — for providing brokerage services must be paid to the firm and then paid to the licensee from the firm. A licensee who accepts compensation directly may be found in violation of the law and subject to discipline by the REEB.
(2) If a licensee is associated with a firm, all fees or commissions and any part thereof for performing any act specified in this chapter and all compensation for a referral or as a finder's fee shall be paid to the firm.
(3) The board may revoke, suspend, or limit the license of any licensee, or reprimand the licensee, if it finds that the licensee has done any of the following: ….
(f) Accepted from any person except the firm with which the licensee is associated, if the licensee is associated with a firm, a commission or valuable consideration for the performance of any act specified in this chapter or as compensation for referring a person to another licensee or to any other person in connection with a transaction.
A licensee has an LLC that is not a licensed broker business entity with the DSPS and wishes to sign offers in the name of the LLC instead of putting personal name on offers. Can offers be completed in this manner with an unlicensed LLC being the drafter?
No. The name of the drafter should be the entity or individual providing brokerage services on behalf of the agent’s firm. If the agents business entity is not licensed, then it cannot provide brokerage services.
Tracy Rucka is Director of Professional Standards and Practices for the WRA.