License requirement for Subchapter S corporations
QUESTION: Several brokers with my firm whose licenses are not on provisional status have formed one-person Subchapter S corporations for the sole purpose of receiving compensation from our firm for their brokerage activities. They filed the necessary paperwork with the Secretary of State’s office to form the corporations and obtained Subchapter S status from the IRS. It has been my understanding that the brokers were not required to designate a broker-in-charge for their corporations; however, I recently heard in a continuing education program that a broker who forms a Subchapter S corporation has to get a real estate license for the corporation. Is that right? Can I get into any trouble for paying compensation to a corporation that doesn’t have a license?
ANSWER: Any business entity conducting real estate brokerage, other than a sole proprietorship, is required to obtain a firm real estate license. See NC Real Estate Commission Rule 58A.0502(a). A Subchapter S corporation is a “business entity,” and thus, before it either engages in or receives compensation from brokerage activities, it must obtain a separate real estate firm license.
Your understanding is correct that a real estate firm is not required to designate a broker-in-charge under certain limited circumstances. The 4 requirements that must be present for the exception to apply are set forth in Commission Rule 58A.0110(c). However, the fact that the firm may not be required to designate a broker-in-charge does not excuse it from the requirement to obtain a firm real estate license.
As to your second question, please don’t push the panic button, but we do think that it could be a problem for your firm to continue paying compensation to any of your brokers’ corporations that remain unlicensed. The Real Estate Commission takes the position that it is contrary to law for a real estate firm to pay a brokerage fee to an unlicensed entity. We suggest that the brokers in question apply for and obtain firm real estate licenses for their corporations as soon as possible.
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