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Legally speaking: Is it OK to pay commission to a team?

By Peg Ritenour, OAR Vice President of Legal Services/Administration

The OAR Legal Assistance Hotline receives an array of real estate-related legal questions — including license law issues, disclosure, contract law, ethics and commission problems, among others. In an effort to help you work within the law, our “Legally Speaking” series spotlights some of the timely questions that are being asked by REALTORS. The following explores the proper method to pay a commission to a team… 

Q: I have an agent affiliated with my brokerage that formed a team called the Jane Doe Team.  Jane has three agents that work on her team. Jane Doe sent me an email directing that any commission owed to the agents who work for her team be paid to the Jane Doe Team. She will then pay the agents per her commission arrangement with the team members. Is that OK for me to do?

A: This may or may not be OK, depending on how the team is structured. First it is important to understand a few key points under Ohio License Law:

  1. Teams are not licensed by  the Ohio Division of Real Estate and Professional Licensing. Agents are permitted to advertise as a team, but are not licensed entities.
  2. Under Ohio licensing laws a broker has a duty to pay an affiliated agent his/her earned share of a commission.
  3. A licensee is permitted to form an LLC, corporation or other legal entity to allow the licensee to take advantage of any tax benefits that may exist by forming an LLC or incorporating.  A licensee who has an ownership interest in such an entity or is an officer of a corporation must provide verification of this fact to their broker and the broker can then legally to pay their commission to that entity. However as an unlicensed entity, no acts that require a real estate license can be performed by that entity.

Based upon these provisions of the license law, let’s now address the question of whether the broker can pay commissions earned by an agent to the Jane Doe Team.

Payment to the Jane Doe Team would be permissible in one of two instances: (1) the Jane Doe Team is an LLC and the agent who earned the commission is a member of the LLC (i.e., has an ownership interest in the LLC), or (2) the Jane Doe Team is a corporation and the agent who earned the commission is either an officer or a shareholder in that corporation. In either of these situations, if the agent who earned the commission has provided verification of such ownership or their status as an officer to their broker, then the broker is permitted to  pay the agent’s commission to the Jane Doe Team.

But what if the team is not an LLC or corporation, or it is, but the agent has no ownership interest in the entity or isn’t an officer? Then according to the Division of Real Estate and Professional Licensing the agent’s commission cannot be paid to the team and instead payment to the agent must come from the broker. This means Jane Doe and the agent working in that team need to discuss the commission arrangement with their broker and payment of the agent’s earned share of any commission must be issued by the broker.

For more information on payment of a commission to an agent’s corporation or LLC, click here.

Tags: legal, Legally Speaking