Why this article is important: Real estate brokerage operations are often formed as corporations, qualified and led by a designated officer (DO). The entity provides a DO protection against personal liability for the actions of the agents or broker-associates it employs.
This article explains how an individual becomes a DO as an administrative employee of a DRE-licensed corporation and provides supervision and oversight of all its employees for compliance with real estate law.
DO immunity from brokerage liability
An individual real estate broker who renders services to the public, other than as a broker-associate of another broker, chooses one of two business structures to operate their brokerage:
- a sole proprietorship; or
- a California corporation.
A broker who operates as a corporation is afforded a personal liability shield against:
- acts of employees of the corporation; and
- debts and obligations incurred solely by the corporation.
Here, the corporation provides protection for a DO by preventing corporate creditors from going after the personal assets of the individual to satisfy a corporate business debt. A sole proprietorship business structure does not provide the individual owner with a shield against personal liability for brokerage operations.
Primarily, the corporation separates business assets from personal assets. An individual is legally distinguishable from the corporation the individual owns or in which it holds a DO position. 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, or they are also actively at fault for a corporate liability.
The reasons for a designated officer
Initially, a corporation on its own does not qualify to hold a broker license. To qualify, the California Department of Real Estate (DRE) requires an individual who is qualified or licensed as a broker to be a corporate officer — such as a president, vice president or secretary. Thus, the individual is issued an officer license and acts as a designated officer (DO) of the corporation.
The DO is usually the individual who established the corporation, holds a real estate broker license and is employed by the corporation to act as the responsible officer. The corporation now licensed as a broker is authorized to employ licensed salespersons and broker-associates to perform brokerage services as representatives — agents — of the brokerage business.
Further, the DO is responsible for administrative duties to ensure compliance with California real estate law, a duty the DO owes the DRE and the corporation, not the consuming public. Supervisory responsibilities over licensed salespersons, broker-associates and all other employees of the corporation are performed or managed by the DO.
Critically, the DO does not interface with the public to personally provide licensing services. The rendering of brokerage services by the corporation is achieved through licensed agents/broker-associates the corporation employs as its representatives.
While the DO answers to the corporation under the DO employment agreement, the DO also answers to the DRE. The DO has a duty owed the DRE to supervise employees of the corporation to comply with oversight and guidance of the corporate brokerage activities.
However, these duties do not extend to third parties, such as clients of the brokerage corporation. Thus, the DO’s immunity forms a shield from claims by members of the public.
Related article:
Brokerage Reminder: Sole proprietorship vs. corporation – it’s the broker’s call
DO qualifications
The individual qualifying as a DO is not required to hold an individual broker license (though most do). When the individual applying for a corporation license is not a licensed broker, the DO needs to have qualified for a broker license by passing the state exam within the 12 months prior to the DRE’s receipt of the corporation’s application for licensing.
As officers licensed by DRE, DOs act solely as administrators — officers do not provide brokerage services to members of the public. However, most DOs hold both an individual broker license as well as a corporate officer license.
Editor’s note — To conduct licensed activities as a representative of the corporation, the DO must individually be a DRE-licensed broker and enter into an additional employment agreement with the corporation as a broker-associate.
Typically, the DO is an experienced broker with a rich industry background qualifying them to lead a brokerage and maintain compliance with real estate law. As a DO, they are required to take an active role over the conduct of employees hired by the brokerage corporation. Be aware, some licensed brokers hire out in rent-a-broker schemes devoid of DO management to hold the DO license needed to qualify the corporation for licensing as a broker. [Read more about the duties of a DO in the second article in this series, The responsible designated officer]
To apply for a corporation license, the individual setting up the business operation submits to the DRE a:
- complete Corporation License Application; [See RE 201]
- Corporation Background Statement(s), when applicable; [See RE 212]
- the licensing fee of $450 for individuals currently licensed by the DRE or $675 for individuals or corporations with an expired license;
- A completed Live Scan Service Request, when applicable; [See RE 237]
- Certificate of Status, Certification of Foreign Corporation, or Certification of Qualification, or Articles of Incorporation, obtained from the California Secretary of State;
- Branch Office Application, when applicable, for each additional office location being added; [See RE 203]
- Certified copy of Fictitious Business Name Statement (DBA), when the corporation is to conduct business under any name other than the corporation’s name. [See RE 282]
Multiple officers, one corporation
While each corporation may have only one DO, some corporations have multiple individuals assigned as additional broker-officers. When assigning additional individuals to act as broker-officers for the corporation, the individual submits to the DRE a completed Corporation License Application. [See RE 201]
The corporation may add as many broker-officers as desired. All brokers who are applying for an additional broker-officer license must hold an officer title in the corporation (the DRE does not accept the term “broker-officer” or “broker of record” as official titles).
A corporation may decide to have multiple broker-officers when:
- it is necessary due to the corporation’s large operational size, ensuring each officer is able to meet the demands of their assignment;
- separation of duties is necessary, often due to the corporation’s size, or sometimes due to each officer’s individual capabilities or areas of expertise (for example, one officer to oversee trust funds, another to maintain records and another to supervise agents); or
- there is concern about the officer’s availability or health.
Having more than one officer can also help prevent fraud, each officer acting as a checks and balances on the other.
Establishing DO employment
Consider an individual licensed as a broker who desires to expand their income-earning potential and act with more autonomy over their real estate practice while limiting their personal liability for actions of agents and broker-associates. The individual decides to establish a real estate brokerage business or convert a sole proprietorship brokerage operation to a corporation.
To develop this business opportunity, the individual sets up a corporation with the Secretary of State, then applies to the DRE for a corporate broker license. The individual as a licensed broker becomes the DO qualifying the corporation for broker licensing by the DRE.
The corporation then hires agents and broker-associates. The DO most likely also becomes a corporate broker-associate by entering into an employment agreement to act as a broker soliciting and representing clients of the corporation.
For documentation, a corporation providing licensed real estate services employs an individual broker as its designated officer, lays out their duties and sets their fee participation schedule using the Designated Officer Employment Agreement. [See RPI Form 511]
The Designated Officer Employment Agreement contains:
- the date the corporation employs the broker as its designated officer;
- a list of boilerplate conditions of the employment the designated officer agrees to [See RPI Form 511 §1];
- a checkbox indicating whether the DO is also employed as an independent contractor of the corporation to also be a broker-associate dealing with members of the public on behalf of the corporation [See RPI Form 511 §1.13];
- a list of boilerplate conditions of the employment the corporation agrees to, with a blank for listing other conditions [See RPI Form 511 §2];
- the designated officer’s fee schedule, including the percentage of monthly fees for which the DO is to be compensated [See RPI Form 511 §3];
- termination conditions, which requires termination in writing, the DO to not interfere with the corporation’s relationship with clients and employees for one year after termination, and for one year after termination and within 25 miles of the office, the DO will not employ any real estate licensee employed by the corporation during the six months prior to termination [See RPI Form 511 §4];
- general provisions, including dispute resolution agreements and a checkbox where an addendum may be attached for additional terms [See RPI Form 511 §5]; and
- signatures of the designated officer and brokerage corporation, creating the assignment of the broker as the corporation’s designated officer. [See RPI Form 511]
Related article:
To learn more about the duties of a corporation’s DO — and common DO violations — watch for the next article in our series: The responsible designated officer.
