By Sarah Stewart Legal Group
People who invest in real estate as a business often invest with other people. When you own property with another person, the ownership structure plays an important role in your business.
Today, we cover five (5) ownership options for investing in real estate.
(1) Tenants in Common
This type of ownership does not require a business structure. It simply means each party that invests in the property has an equal ownership share in the property.
Ownership of property as tenants in common does not provide protection from business liability to the owners. It can also become messy if one of the owners passes away, as that owner’s interest in the property will pass to their heirs.
A partnership is a business entity where the owners all share liability and profits of the business. Depending on the partnership agreement, some partners can have limited liability, meaning they will not be responsible for the other partners’ liabilities; but generally, the partners are equally personally responsible for all business liabilities.
A partnership agreement does allow the parties to determine how their interest will pass when one partner dies, giving partners more control over the property’s ownership after a partner’s death.
(3) Limited Liability Company
To form a limited liability company, the owners must register with the Secretary of State for the state where they do business. There is an initial fee, and usually, an annual fee to re-register each year.
Limited liability companies limit the members’ personal liability for business debts. This means creditors of the business cannot go after the personal assets of the members, unless the members personally guarantee those debts. These entities do not require a board of directors or minutes of meetings.
There can also be some tax benefits to owning a limited liability company because certain business expenses can be deducted from income. Limited liability companies can also elect to file taxes as an S Corporation. If you are considering starting a limited liability company, you should speak to an accountant.
(4) S Corporation
To form an S Corporation, the owners must register with the Secretary of State for the state where they do business. There is an initial fee, and usually, an annual fee to re-register each year.
S Corporations are named after the section of the tax code that governs their structure. S Corps are corporations where the profits and losses of the business pass through to the owners and are claimed on their individual returns, not those of the business.
S Corps are a hybrid entity that allow certain tax considerations of a corporation and a pass through entity. For the right business, it is the best of both worlds. These entities do not require a board of directors or minutes of meetings.
S Corps have specific requirements about who can be a shareholder, including the type of entity and citizenship status. Be sure that you are following these criteria if you elect an S Corp entity.
S Corps do provide their shareholders with limited liability for business debts.
(5) C Corporations
To form a corporation, the owners must register with the Secretary of State for the state where they do business. There is an initial fee, and usually, an annual fee to re-register each year.
C Corporations, like S Corporations, are named for the section of the IRS code that governs their taxes. C Corps are your classic corporations.
C Corps offer limited liability to owners and allow the company to sell shares of stock in the corporation. There are no requirements on who can hold shares. This gives the entity unlimited growth potential.
Corporations are required to have a board of directors that hold annual meetings and keep minutes of those meetings. They are taxed as an entity and shareholders are taxed individually on their dividends.
If you choose a business entity to hold your investments, we highly suggest you put a business contract into place that outlines the rules, requirements, and other agreements for your owners in your business. Without this contract, you will be open to owner disagreements and litigation along the way.