Contributed By Allen Matkins Leck Gamble Mallory & Natsis LLP
Corporations are subject to double taxation and are very limited in how profits can be shared. They are generally thought to be tax-inefficient for holding real estate or appreciable assets, and are better for holding operating businesses, although this thinking may change somewhat with lower corporate tax rates.
Partnerships and LLCs generally allow partners and members to move in and out of real estate investments that have appreciated with relative ease, minimizing taxation. In some jurisdictions, an LLC may be prohibited from holding a real estate license or general contractor’s license, while a corporation may be permitted to do so. Corporations may be less flexible in how profits can be shared, however.
Partnerships and LLCs offer flexibility in reflecting the business arrangement of the partners or members. LLCs are useful in documenting varied economic arrangements, and are also very flexible in assigning day-to-day control, management and implementation, such as the right to sell property, refinance, or change business plans or budgets.
Partnerships and LLCs also allow for individually tailored exit provisions for partners and members.
Corporate shareholders, like LLC members, are generally shielded from liability, as liability remains fixed in the corporate entity. In partnerships, only the general partners or sometimes all the partners may be subject to liability. For this reason and those above, the LLC is often the preferred and most widely utilized vehicle for real estate investments.