Using “holding companies” to reduce risk when buying commercial real estate
When an individual purchases commercial real estate, one might want to consider using a holding entity for that purchase. Holding entities or holding companies help commercial real estate buyers minimize potential liabilities and risk they could incur as a result of owning property, and in some cases can provide anonymity and privacy protection.
Holding entities isolate one or more properties from the owner’s other assets, making it more difficult for a creditor to recover their other property to satisfy a judgment or other debt against the holding company. Additionally, the separation that a holding entity provides often makes things easier from a financial reporting and taxation perspective.
It is widely encouraged to start a holding entity rather than to personally own a piece of real estate or to hold it commingled with a variety of other assets to minimize liabilities and risks.
We highlighted a few different entities in which one might want to consider when purchasing commercial real estate.
Different types of Holding Structures
S-corporations and C-corporations provide you with limited liability protection, however, LLCs are frequently favored for real estate transactions over S-corporations and C-corporations. Both types of corporations tend to have more regulatory and reporting requirements than LLCs, and require more formal management. S-corporations are flow-through entities, similar to LLC’s, in which profits and losses may pass through directly to the owners rather than being retained at the corporate level. LLCs are typically favored rather than S-Corporations because S-corporations have limits as to how much loss can be claimed on tax returns and LLCs can elect to be taxed as an S-corporation, anyway
A limited liability company, also known as an LLC, is a type of legal entity that may be formed to own and operate a business or hold real estate. They are most commonly used because they provide the same limited liability as a corporation, but are easier and less expensive to form and manage.
When you own one or many LLCs, there is limited liability between each company. If one's business gets into trouble financially or otherwise, if managed properly the others are usually without risk. This means that your real estate property’s legal issues should not affect your other assets, whether business or personal. If an individual decides to sue your company due to injury or otherwise, only the business in which they were injured may be subject to legal action. Your personal property, your home, family car, kids college funds, etc. will all be protected because they will be held separately from your business. Of course, there are limits to this protection which require that the business be operated as a true separate entity, maintain separate books and records, and not be structured as a mere shell corporation.
Additionally, an LLC provides tax flexibilityless ongoing administrative demands.
Property ownership by land trust is a streamlined and cost-effective solution to holding real estate. A properly established Land Trust will prevent an individual's name from being affiliated with a property, such that individuals looking to determine whether you have collectable assets will be forestalled. This is a crucial protection for individuals that are commonly the target of frivolous lawsuits.
Land trusts are beneficial for holding commercial real estate because they allow the owner to remain anonymous, may reduce their tax burden, protect individuals from liability, and prevent property liens and judgments. A land trust can also be used in conjunction with an LLC or corporation.
While there is no perfect entity for your investment, you will find that each entity holds specific assets that may assist you with holding and managing commercial real estate property.
Below, we outlined the process of forming an entity to hold commercial real estate.
If you have any other questions or require legal assistance throughout this process, contact Kershner Sledziewski Law today.