C, S, or LLC Corporation for Holding Company?

Question

Anyone know which would be better? Say for a real estate holding company. A company that does nothing but hold assets.

Answer 1

The answer depends on who & how many people are involved, how many properties and their use.

Typically entities are created to get a benefit from the form of the entity. If it is just you and a small number of people who intend to hold one property for a long period and there is no personal liability issue creation of an entity might be an inferior choice compared to simply titling the property appropriately ( joint tenants or tenants-in-common). Entities can create a tax return filing requirment and/or minimum tax payment needlessly.

Also, like marriages, entities are easy to create & often complicated to dissolve.

Furthermore, financing will be more difficult and expensive, at least at first, and you likely will still be required to sign personally anyway.

The main benefits from any type of entity in a real estate holding company are limitation of liability and facilitating changes of principals (ie members or shareholders). Insurance is a better/cheaper way of solving the first problem (if it exists) and until you anticipate selling interests in the property to others than a close group I believe that titling of the property is the first, best plan.

Hank Roitman, EA
Sacramento, CA

Answer 2

Actually from a tax standpoint a C corporation would be the aboslute worse thing you could do. As a CPA, I advise many real estate professionals and I can tell you the short answer is "it depends". Normally I would advise an LLC for holding real estate assets, but there are times when an S corp makes more sense. An LLC typically works better because its somewhat easier to pierce a corporation (by arguing a corporation is undercapitalized or showing that it hasn't held board meetings or elected board members, etc) but laws vary by state so I would talk to a lawyer before doing anything. Also - LLC's are taxed as C corps by Texas so don't use them there.

The most successful Real Estate developers I've worked with normally have either an S corp or an LLC as their "holding company". But these "holding companies" don't actually own any real estate assets, instead they own other entities that own the assets. For example - Building 1 is owned by Building 1 LLC which is in turn owned by Holding Company Inc and the developer owns Holding Company Inc. The idea is to structure your investements in a manner that prevents the failure of one project to bring down all the other projects. This structure is somewhat more complex to administer and not always advisable for smaller operations but it is ALWAYS used by high net worth (over 10million) developers.

Other things to consider:

An LLC cannot own an S corp but an S corp can own an LLC.

Banking regulations often require higher interest rates and loan terms when an asset is owned by an LLC rather than an individual (in case this is your first project).

If you are considering taking on a Partner, LLC's allow you to carve up the income virtually anyway you see fit, but S corps split income based solely on the number of shares owned by each shareholder.

When you sell the asset and liquidate the entity holding it, there can be different tax implications depending on whether it was an LLC or S corp. Its better to spend a couple hundred on tax advice than pay tens of thousands in unnecessary taxes. Besides, most accountants will give you free advice upfront in order to build a relationship and get your business later. Just a thought.

EDIT: I saw another post say that real estate debt increases your basis in an LLC. But it rarely matters because real estate losses are more often disallowed by the Passive Activity rules than by a lack of basis in an LLC. Just thought I'd clarify that...

Answer 3

You did not mention in your question how many owners/members there would be in the holding entity. I am assuming you would be the only one. If so, a single member limited liability company would be a good choice if you were to want to perform a 1031 tax deferred exchange in the future. A single member LLC is a disregarded entity for federal taxation purposes which would help you should you ever want real estate put back into your individual name in the future for financing purposes.

When forming a corporation and placing an asset such as real estate into it, you will not have the flexability to take the property out of the corporation without paying taxes.

Answer 4

I'm not a lawyer, accountant, or real estate pro, and the best answer depends on more details about your situation, but consider using a Delaware Series LLC, especially if holding many properties/projects.

Answer 5

The first answer is dead wrong. The second answer is half wrong. Holding real estate generally means holding real estate subject to debt. The amount of the debt increases your basis in your partnership or LLC interest. Debt incurred at the corporate level does not increase your basis in your S corporation shares. C corps do not pass through losses attributable to depreciation.

Answer 6

in case you're no longer a US citizen, you may desire to be a resident alien in any respect circumstances to have an S enterprise. you're meant to record the 2553 interior 2 month/15 days of forming the LLC.

Answer 7

Clearly a Corporation!!