Greater independence is your greatest advantage when you hold a Department of Real Estate (DRE) broker license. A DRE-licensed broker may operate:
- as a broker-associate under the supervision of an employing broker;
- independently, as a self-employed broker, with or without DRE licensees in their employ.
Most individually licensed brokers choose to conduct their real estate business rendering services to members of the public as a broker-associate employed under a supervising broker. The broker-associate becomes an agent for the corporate broker that employs them — an agent of the agent their client actually employs.
A broker-associate is exposed to no greater liability when employed by a supervising broker than a comparably trained and experienced DRE-licensed salesperson employed by the same supervising broker.
However, operating independently of a supervising broker offers a greater opportunity for wealth and career advancement. It also carries additional risk.
Real estate brokers rendering services to the public, independent of employment by another broker, choose one of two business structures to operate their brokerage:
- a California corporation; or
- a sole proprietorship.
Brokers who form a corporation for conducting their brokerage operations do so to limit personal liability.
Operating as a corporation, the individual broker serves as the company’s licensed designated broker-officer. The broker will be the corporation’s corporate officer responsible to the public and DRE for the operations of the business and the supervision of its employees — including other licensees.
A broker who wants to establish a corporation needs to:
- file Articles of Incorporation with the California Secretary of State (SOS) establishing the corporation;
- register a Fictitious Business Name Statement with the county clerk of the county of the corporation’s principal place of business if a name different from the corporation’s is used; and
- submit a Corporation License Application to the DRE completed by the designated broker-officer applicant and each broker-officer who is to act for and on behalf of the corporation. [See DRE Form RE 201]
An individual who is qualified to apply for a broker license by passing the DRE state licensing examination may personally obtain a corporate broker-officer license. Here, they do not themselves need to also be individually licensed as a DRE broker.
However, the licensed officer qualifying the corporation will only be allowed to conduct licensed activities directly with members of the public on behalf of the corporation. Thus, they cannot conduct any licensed activities outside of the corporation unless they obtain and maintain an individual DRE broker license.
In addition to the primary broker-officer designated to qualify the corporation for its broker license, the DRE will issue any number of broker-officer licenses sought.
A broker who operates as a corporation is afforded a personal liability shield against:
- acts of others employed by the corporation; and
- debts and obligations entered into solely by the corporation.
Here, the corporation provides protection by preventing corporate creditors from going after the personal assets of the individual broker to satisfy a corporate business debt.
However, the liability shield is not available to bar a creditor’s collection of the personal obligations or conduct of the broker-officer who operates their brokerage business as a corporation.
Primarily, the corporation separates business assets from personal assets. Each individual is legally distinguishable from the corporation the individual owns. The corporation and the individual have separate obligations, liabilities and assets.
Thus, when the corporation is sued or files for bankruptcy, the “owner’s” personal assets will not be at risk — unless they manage their personal expenses under the corporate umbrella, the alter-ego situation.
However, the limited liability provided by a corporation does not protect the broker-officer from liability for their professional activities when acting as a real estate agent. Here, the broker who also actively participates in a transaction that is the subject of litigation is not protected by the corporate shield against an adverse judgment award due to their personal conduct.
The sole proprietor
Alternatively, a broker who conducts business as an individual and does not operate through a licensed corporate entity is a sole proprietorship by default. Thus, the individual broker operating as a sole proprietor is the business.
An individual broker operating independently of an employing broker and conducting their service business as a sole proprietor takes on exposure to liability.
Many small-business owners, including real estate brokers, establish their businesses as sole proprietorships. Typically, the individual broker seeking to be independent — who is not employed by another broker and does not employ other licensees — recognizes they are always responsible for their own actions whether acting as a sole proprietorship or under a corporate umbrella. Thus, they may chose not to incorporate and save the initial and annual costs of maintaining a corporation to shield themselves from liabilities created by others.
A broker as a sole proprietor is responsible for all the legal and financial liabilities of their brokerage business. These liabilities include the:
- business debts;
- operating losses; and
- actions of their employees.
If the brokerage operated as a sole proprietorship incurs debts or other legal liabilities, the broker is directly responsible for payment of these obligations from their own income and assets. This may eventually result in personal bankruptcy to settle excessive debts and liabilities of the brokerage business.
If the broker acting as a sole proprietorship is sued, personal assets in addition to their business assets may be at risk of seizure to satisfy any settlement or judgment. Errors and omissions (E & O) insurance covers negligent conduct when acting as a licensee. It does not cover business operating liabilities or promotional expenses — or intentional misbehavior.
Similarly, if the broker is personally sued for any occurrence outside of business activities, such as in the case of a car accident or another person’s personal injury at their home (both of which can be covered by other insurance policies), the broker’s business assets in addition to their personal assets are at risk to satisfy any judgment not covered by insurance.
Conversely, a broker who incorporates their brokerage is protected from personal liability for the activities and conduct of their agents and employees.
Incorporating a real estate brokerage business has its pros and cons. Prudent brokers will plan accordingly before placing themselves at risk. Protecting their personal assets by forming a corporation needs to be the primary consideration if they intend to employ other brokers and agents.
This article was previously posted in 2015, and has been updated.