Expert Opinion
What is in a Name?
“That which we call a rose by any other name would smell as sweet.” … Shakespeare. That may be true for Romeo and Juliet, but what’s in a name when it comes to investing in real estate?
Quite a lot actually … when investing in real estate, you need to carefully look at the different choices of entity. Things to consider are formation requirements, liability protection, and, of course, tax benefits.
Sole proprietorship is the simplest choice. There are no requirements to form and taxes are reported at the individual’s tax rate. There is no limit on personal liability or debts or claim against a business; however, sole proprietorship does not allow for additional investors or partners.
A general partnership is when two or more people carry on a business for profit. This type partnership is easy to organize, and it has one level of taxation. The profit and losses are passed through to the individual partners for federal and state tax purposes. There is no liability protection; every partner is liable for the action of partners and employees of the partnership.
A limited liability partnership (LLP) has general and limited partners. General partners control day to day operations and have full liability, while the limited partners have liability protection. This type partnership is commonly used for law firms and public accounting firms.
A limited liability company (LLC) is as the name says … it provides limited liability for individual members. Taxes, profits, and losses are handled on an individual basis. The transfer of members and interest are simple. This is a common and simple ownership for real estate transactions.
Tenancy in common (TIC) is treated like a general partnership in that you are personally liable for debt and claims that arise. Usually it takes two or more individuals or entities to create the TIC, and in the event a death occurs, the TIC is easily transferable to an estate. TIC also qualifies under the 1031 exchange rules and allows capital gains to be deferred until later.
The subchapter “S” corporation provides a liability shield and avoids double taxation that occurs in a “C” corporation. Profit and losses are passed through to shareholders. Self employment taxes are not imposed on profits but reasonable salaries must be set for partners who are employees. Passive income has some limitations and only individuals who meet certain criteria are allowed to be shareholders in any “S” corporation.
The subchapter “C” corporation may be a good choice after a business achieves sufficient growth. The “C” corporation promises liability protection to the individual shareholders. If profits remain in a “C” corporation, double taxation occurs. The state and the IRS both require certain forms to be filed.
This is a very simplistic explanation of different types of entities which may be used when investing in real estate. We at Bentley Commercial can help you find that great piece of real estate, but when it comes to taking title, we always advise investors to consult with their attorneys and accountants in order to be fully informed and to have a good understanding of legal and financial responsibilities. After all, we don’t want you to end up like Romeo and Juliet …
Kevin Bentley would like to talk with you about your real estate goals. Whether you lease, own, invest, develop, sell—with Bentley Commercial you will find an expert team committed to you, and your short and long-term commercial real estate success.*
