Corporations
Corporations are a legal entity owned one or more
shareholders. They can be private or public like Ford,
Microsoft, Federal Express, etc.
As a real estate investor, you can create your own private
or closely held corporation by filing articles of
incorporation and bylaws with the appropriate state agency.
Requirements for incorporation will vary from state to
state.
The primary advantage (among others) is limited liability
for share holders. Since the owners of a corporation
actually own stock and not the real estate, the most
shareholders can lose is their equity investment.
The disadvantage of a corporation relates to initial
expenses:
It costs money to have an attorney draw up the
organizational documents. There are also costs to cover
extensive reporting requirements at state and federal
levels for maintaining corporate status. If these
requirements aren't meant or if there's lack of
capitalization, creditors or lien holders can seek personal
liability from individual shareholders.
There are two types of corporations:
C corporations One advantage of this type of corporation is
that it has continuity (it continues in the event a
shareholder dies). It has two disadvantages: The major
disadvantage of a C corporation is that it's taxed
twice--once when the business makes a profit and then a
second time when those profits are distributed to
shareholders. Another disadvantage is that if the
corporation has losses, it has to carry them over to the
next tax year because the shareholders can't use C
corporation losses on their personal returns. S
corporations This type of corporation has the advantage of
avoiding double taxation by passing all tax liabilities
onto shareholders. As such, S corporations are only taxed
once.
However, they're seldom used in real estate ownership
because their primary disadvantage is that the liquidation
of an S corporation is a taxable event. This means that
even if the shareholders agree to an equitable distribution
of assets, the Internal Revenue Service will consider the
liquidation as taxable. The shareholders will then be
forced to pay capital gains taxes and possibly sell some of
the assets.
In addition, there's the issue of material participation.
This is an IRS term that indicates whether an investor
worked and was involved in a business activity on a regular
basis. It has a series of tests to determine material
participation which affects the tax benefits you may or may
not receive.
Generally speaking, incorporation is an expensive choice
for holding real estate assets if you're an average real
estate investor. You must be willing to pay for the
professional, legal and accounting advice not only at the
beginning but also on a continual basis. These expenses can
mount up. You also have to deal with the hassle of ongoing
technical requirements and the possible expensive
possibility of double taxation.
Key Point: Know your investment objectives and state and
federal laws concerning title holding; then, select the
form that best meets your investment needs. Do seek out the
services of an attorney first.
Jack Sternberg
----------------------------------------------------
Jack Sternberg is a nationally recognized expert on real
estate investment and the creator of the renowned "Buyers
First Program" who's been in the business for more than 30
years. Sternberg's deals have totaled over $750 million and
he's been to the closing table more than 1,500 times. For
more, visit http://www.askjacksternberg.com
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