Legal ownership of a commercial property is a form of ownership recognized by the government and courts as having legal rights associated with it. Commercial property ownership models include the following: sole proprietorship, partnership, limited liability company (LLC), corporation, tenants in common or business trust. We've provided general descriptions of the various ownership models below for information purposes only. Prior partaking in the purchse of a commercial investment property, individuals and businesses should consult with their own legal and tax advisors.
Sole proprietorship is ownership by a single person. Tax advantages may be realized by having the associated income and losses of the property flow through the investor’s individual tax return. However, this type of ownership puts all the investor’s individual assets at risk. Sole proprietorships carry unlimited liability, which means the courts can use the individual’s personal assets to satisfy legal judgments.
A general partnership is ownership by two or more persons or business entities. Each member of the partnership is considered a general partner and has equal rights and responsibilities unless otherwise agreed. It is the default form of partnership that is created when two or more persons or business entities engage as co-owners of a business-for-profit. It is important to determine what ownership model you wish to engage prior to making an offer to purchase a property. General Partnerships fall under state regulation. General partnerships are tax reporting entities, but not tax paying entities. Taxes are paid through the individual tax returns of members of the partnership.
Each partner has unlimited liability for any legal or financial responsibilities of the partnership. All partners can be liable for one partner’s actions.Limited Partnership
A limited partnership (LP) is comprised of at least one general partner and one or more limited partners. The general partners are responsible for all business management, including deciding when to sell the property, and assume unlimited legal and financial liability. Limited partners generally are only liable for the money they invest and no legal liability for the action of the general partners. Limited partnerships are tax reporting entities, but not tax paying entities. Taxes are paid through the individual tax returns of the partners.Limited Liability Partnership
A limited liability partnership (LLP) is an ownership entitity comprised of any number of limited partners. This is a rarely used ownership model for commercial real estate. In this model, one or more
Member-managed Limited Liability Company. In a member-managed limited liability company (LLC) all members have an equal say in business operations. All members also enjoy limited legal and financial liability.
Manager-managed Limited Liability Company.In a manager-managed limited liability company (LLC) a manager is appointed to run the business. Members are like limited partners holding ownership interests without any management responsibilities. The manager can be a member of the LLC or an outside party. A multi-member LLC by default is taxed as a partnership; however, the LLC can elect to be treated as an association and taxed as a corporation.
LLCs may include different classes of investors, allowing for a disproportionate allocation of benefits among the members. Laws governing LLCs differ by state.
C-Corporation. A C corporation (C corp) is owned by one or more shareholders, who can be individuals or business entities, and managed by directors. Shareholders enjoy limited liability, with their equity investment at risk but without liability for the corporation’s debts. Shareholders are taxed on any dividends received. An ownership interest in an C corp is not eligible for a 1031 Exchange.
S-Corporation. An S corporation (S corp) is a corporation or association that is owned by individuals, estates, trusts or tax-exempt entities (with limitations) and has elected to be taxed as an S corp. An S corp is taxed similar to a partnership and offers limited liability to shareholders. An ownership interest in an S corp is not eligible for a 1031 Exchange.
Real Estate Investment Trusts (REITs) are traded on the stock market. These companies invest the majority of their assets in real estate. Typically REITs specialize in a property type such as retail or medical office properties but invest in commercial properties in a variety of geographical areas.
Tenants in Common (TIC) or Tenancy in Common is where two or more parties each hold an undivided interest in a property and have equal right to use and possess the property. TIC can hold unequal interests and these interests can be sold separately, mortgaged or willed to another party.
It is common for real estate investments held as a business trust to take the form of a Massachussetts Business Trust, a Maryland Statutory Trust, a Delaware Statutory Trust or State Law Created Land Trusts. Prior to forming a busienss trust we recommend consulting with a CPA or tax attorney.