CA LLC Taxed as Partnership and S Corp Expenses

New realtor client came to me after starting an LLC (in CA) taxed as a partnership. The members (3 in total) are all realtors who intend to combine expenses/commissions and then distribute the cash. As I just found out, the members each have their own personal S corps and intend to use the earnings from the LLC to go to their S corps which they then pay themselves a reasonable salary/distributions. At the moment, the operating agreement notes the members are the individuals, not the S corps. Is there anything wrong with having the LLC pay the S corps and considering these payments to be expenses of the LLC? Or will this be viewed as a contribution from the member to the S corp? It sounds like they are hoping to view these payments to the S corps as expenses but I'm getting a bit fried thinking about this.

One complicating factor is the LLC fee & tax since this is a CA LLC that we're talking about. The LLC revenue is expected to exceed $1mm during the year and as an LLC, their estimated fee (which is based on gross receipts) is $6,000. They want to avoid this if possible and asked if it was possible to convert the LLC to an S corp so that they would only have to pay the $800 annual fee (assuming that the payments to the S corps can be considered expenses and their partnership income is low as a result). In CA, S corps still pay an annual fee which is based on income instead of gross receipts. Without this factor, I would have said that the LLC members should just be the S Corps but if the LLC turns into an S corp then that's out of the question.

Can an LLC be licensed as a real estate salesperson in CA?

Can an LLC be licensed as a real estate salesperson in CA?

No. But there are some new "group" realtor things popping up with LLC's that I've seen around. I'm not sure if those somehow skirt the law that prevents a realtor from operating under an LLC. Maybe since the broker is engaging a group instead of a single agent.

Also, only brokers can operate under an S corp. An agent can definitely not.

They should contact the CA DRE legal department and ask if their structure is permissible under CA law.

That's what I was getting at Miles.

Taking California law into consideration, assignment of income doctrine blows this whole structure. I don't see how a CA real estate agent can operate as anything other than a Schedule C for income tax purposes. RE agents doing cost sharing should be fine.

This whole issue is heavily based on state law and will vary.

They did consult with a lawyer about their structure and I didn't look into it any further. Based on my limited review of allowed structure, it seems as though corporations are allowed. If a new corp is setup, the same question still applies: can the new multi-shareholder corp pay the individual corps and recognize the payment as an expense?

They did consult with a lawyer about their structure and I didn't look into it any further. Based on my limited review of allowed structure, it seems as though corporations are allowed. If a new corp is setup, the same question still applies: can the new multi-shareholder corp pay the individual corps and recognize the payment as an expense?

Is it the same lawyer that is charging all of them to setup multiple LLC's and corporations? Conflict of interest?

It seems very odd to me.

Why would the main entity pay the shareholder corps and try to deduct it? Wouldn't the net income just pass through to the shareholders as their share of ordinary income? I would think in your original post that the individual shareholders could probably contribute their ownership into their S corps and make the S corp the new shareholder of the partnership.

The taxing authorities probably won't even bother anything, but I think having an agent act as anything other than an individual is incorrect in CA. The LLC cannot be licensed as an agent. Only an individual can.

They did consult with a lawyer about their structure and I didn't look into it any further. Based on my limited review of allowed structure, it seems as though corporations are allowed. If a new corp is setup, the same question still applies: can the new multi-shareholder corp pay the individual corps and recognize the payment as an expense?

Maybe one of these realtors should get their broker license and then setup the S corp with the broker license, then all the agents can be shareholders and take payroll and whatnot as they like.

Why would the main entity pay the shareholder corps and try to deduct it?

To minimize the CA franchise tax (or LLC fee, in its present form).

Wouldn't the net income just pass through to the shareholders as their share of ordinary income?

Yes. They are hoping to limit the net income by paying the S corps. Net income would be close to zero with the expense paid to the S corp.

I would think in your original post that the individual shareholders could probably contribute their ownership into their S corps and make the S corp the new shareholder of the partnership.

Yes but they are hoping to avoid the LLC fee which this doesn't resolve.

The taxing authorities probably won't even bother anything, but I think having an agent act as anything other than an individual is incorrect in CA. The LLC cannot be licensed as an agent. Only an individual can.

It can be a corporation as well.

What's the additional accounting, payroll service, and tax prep fees for 4 business tax returns versus 3 Schedule Cs versus the LLC fee?
Does not sound cost effective.

We can guide clients to water but we can't make them drink.

So no issue recording the amount paid out as commission?

The "best" thing is to have the group operate under a single S corp and have one of the shareholders hold a broker license and license the corp. I have a "group" that I deal with and this is how they handle it. The main broker (I think Keller Williams) pays the S corp group (licensed as a broker) who is the "agent group" essentially. The other agents in the group are either shareholders and/or employees, or the group will 1099 another agent.

As you mentioned, the LLC as the front man will get hit with the gross receipts tax. All the S corps will have their own $800 tax. So fewer entities is better.

MilesR wrote:
The taxing authorities probably won't even bother anything, but I think having an agent act as anything other than an individual is incorrect in CA. The LLC cannot be licensed as an agent. Only an individual can.


It can be a corporation as well.

Under CA law, a brokerage can operate through a corporation. If you've seen anything in the statute that allows a salesperson to operate as a corporation, I'd be very interested in seeing that.

Without besmirching anyone, there are varying degrees of competency among attorneys, just like everyone else. Some are willing to put a walk-in into whatever entity structure they want, no questions asked. Some actually hit the statutes as step 1 to figure out what is permissible given the business that will be conducted and the licenses that will be needed. The latter are worth whatever they want to charge as it avoids big problems in the future.

I stand corrected, a brokerage can operate through a corporation but there's nothing in the statute that I can see either that allows a salesperson to operate as a corporation.

The "best" thing is to have the group operate under a single S corp and have one of the shareholders hold a broker license and license the corp. I have a "group" that I deal with and this is how they handle it. The main broker (I think Keller Williams) pays the S corp group (licensed as a broker) who is the "agent group" essentially. The other agents in the group are either shareholders and/or employees, or the group will 1099 another agent.

As you mentioned, the LLC as the front man will get hit with the gross receipts tax. All the S corps will have their own $800 tax. So fewer entities is better.

I'm curious about this. If under CA law licenses for real estate salespersons are only given to natural persons, who is listed as the buying and selling agent in the contract? Wouldn't it be the name of a person and not the name of the brokerage?

If yes, then don't we still have assignment of income problems?

The "best" thing is to have the group operate under a single S corp and have one of the shareholders hold a broker license and license the corp. I have a "group" that I deal with and this is how they handle it. The main broker (I think Keller Williams) pays the S corp group (licensed as a broker) who is the "agent group" essentially. The other agents in the group are either shareholders and/or employees, or the group will 1099 another agent.

As you mentioned, the LLC as the front man will get hit with the gross receipts tax. All the S corps will have their own $800 tax. So fewer entities is better.

I'm curious about this. If under CA law licenses for real estate salespersons are only given to natural persons, who is listed as the buying and selling agent in the contract? Wouldn't it be the name of a person and not the name of the brokerage?

If yes, then don't we still have assignment of income problems?

I am not a pro in real estate law, but the way I understand it, is it's the agent group instead of a single agent. The main broker pays the group as the agent. The "agent" group has a broker license even though it's not technically the broker in most cases.

How is an "agent group" identified? By the corporation or by the names of the individuals?