BUSINESS WATCH

Ownership of Real Estate:   What Type of Entity Should One Choose?

 

A lot of time, effort and money are invested in making the initial decision of whether or not to purchase real estate.  Perhaps equally as important is choosing the most advantageous ownership entity for holding that real estate.  Ownership of real estate may be held in a number of different ways, and various factors should be considered when making such an important decision.  While not an exhaustive list, for purposes of this article, the following entities will be discussed as holding entities of real estate: C corporations, S corporations, Partnerships and Limited Liability Company.  When choosing an ownership entity for real estate, some of the important factors that should be reviewed include: protection from personal liability, potential tax consequences, the availability of transferring ownership interests and form of management.

 

 C Corporation

 

The shareholders, directors and officers are generally not held liable for the obligations of the corporation.  A shareholder’s membership in the corporate entity is evidenced by his or her subscription and payment for shares in the corporation.  The shareholder’s liability is typically limited to their amount of money invested to purchase shares.

 

With regard to tax considerations, a C corporation is the least preferable choice of entity for holding real estate.  Any earnings distributed to shareholders are subject to “double taxation:” first as corporate income and again as dividend distributions.  Any gain resulting from a subsequent sale of the property will also be subject to this “double taxation.”

 

The transferability of ownership interests in a C corporation, as evidenced by shares, is fairly simple.  Barring any restrictions on the transfer of shares, a corporation is usually the easiest entity to buy, sell, or trade shares in than any other form of ownership interest.  Management of the corporation is vested in the directors and officers and shareholders may participate in this management by electing representative directors to determine policy.  

 

S Corporation

The liability protection of an S corporation is virtually identical to that of a C corporation where shareholders, directors and officers are not held personally liable for the obligations of the corporation.  The tax consequences of holding real estate in an S corporation, however, are not quite as severe as those of a C corporation.  An S corporation is classified as a “pass-through” entity, which means that the entity’s income (or loss) passes through the entity to the owners and is taxed only once as individual income.  One tax disadvantage is that some losses of the S corporation will not pass through the corporation to offset pass-through gains.

 

Transferring ownership interests and management of the S corporation are also very similar to those of a C corporation.  A couple of disadvantages of the S corporation are that stock is limited to one class of stock, and there may only be 100 shareholders of that stock.  The one class of stock limitation particularly curtails the availability of offering differing levels of ownership interests in the S corporation.

 

Partnership

 

Liability protection provided through a partnership arrangement is largely dependent upon the type of partnership entered into.  Under a general partnership structure, each of the partners may be held individually liable for the obligations of the partnership.  A limited partnership, on the other hand, will provide individual liability protection for the limited partner but not for the general partner.

 

 

 

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