REALWorld Law

Corporate vehicles

Types of vehicle

What types of corporate vehicle to hold real estate assets are available to investors in this country?

United States

United States

The most common vehicles used to hold real estate in the US are limited liability companies and limited partnerships. Both entities offer liability protection and both are pass-through entities for US federal income tax purposes, which means that the entity itself does not pay income tax; instead, the partners or members are taxed on their share of the profits. A general partnership is also a pass-through entity for US federal income tax purposes, but does not provide liability protection; thus, a general partnership might be utilized when all partners are themselves liability protection entities (such as limited liability companies).

The United States also recognizes corporations which may be ‘C corporations’ or ‘S corporations’ for US federal income tax purposes. ‘C corporations’ are not pass-through entities and thus are rarely used to hold real estate. ‘S corporations’ are pass-through entities, but ‘S corporations’ are not permitted to have entities or non-resident aliens as shareholders. For these reasons and because ‘S corporations’ have tax disadvantages that make them undesirable for holding real estate, those types of entities are not dealt with here.

Other vehicles used to hold real estate include land trusts (uncommon and typically used as an estate planning tool for wealth transfers; including minimizing taxes and the proper and efficient transfer of assets).

Finally, real estate may also be held by entities such as real estate investment trusts (REITs) or publicly traded partnerships. The governance and tax treatment of such entities are very complex.

The cost of setting up a legal entity can vary and depends on several factors. First, costs will depend on which of the 50 states is selected as the state of formation; each state has its own schedule of formation fees, annual fees and taxes. It is common in the US to form legal entities in Delaware (Delaware laws are often preferred); however, if the real estate is located in another state (usually the case), the Delaware entity will need to register (and pay applicable fees and taxes) in the state where the real estate is located.

Second, cost will depend on the terms of the governing documents for the legal entity; if there is only one investor, the governing documents are usually simple, but if there are multiple investors with varying interests, the governing documents can be complex, which will increase legal fees and costs. Finally, the state tax treatment of certain legal entities (such as limited liability companies) varies from state to state so that tax advice is often needed with regard to the choice of the appropriate legal entity.

The laws which govern a legal entity will be the laws of the state in which the legal entity is formed. Each state typically has a set of governing statutes for each of corporations, general partnerships, limited partnerships, and limited liability companies. Some states also permit real estate to be held through a land trust.

Note that a real estate investment trust or REIT is a US federal income tax designation for a corporation, trust or association which invests in real estate and functions to reduce or eliminate corporate income taxes. REITs are required to distribute 90 percent of their income, which may be taxable, into the hands of the investors, and have many other complex requirements. The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks. Like other corporations, REITs can be publicly or privately held. Public REITs may be listed on public stock exchanges like shares of common stock in other vehicles.

On 1 January 2024, the Corporate Transparency Act (CTA) came into effect, requiring certain non-exempt business entities (known as “reporting companies”) to file information on their “beneficial owners” with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). The CTA also requires filing information about “company applicants” for entities formed on or after 1 January 2024, which may include executives, law firm personnel, and corporate filing and maintenance company employees. The CTA requires any “reporting company” to complete and submit disclosure forms to FinCEN, including the identity of any “beneficial owner” of the company. A “reporting company” is a corporation, limited liability company or other entity created by filing a document with a secretary of state or similar office under the laws of a state in the United States. This includes foreign companies registered to do business in the United States. FinCEN has established 23 types of exemptions from being a reporting company. These include governmental authorities, certain types of banks and bank holding companies, broker dealers, investment advisors and other investment companies registered with the SEC, insurance companies, large corporations and certain “pooled investment vehicles”. Determining whether an entity qualifies for an exemption will require a close reading of the text of each exemption and related definitions. Reporting companies created before 1 January 2024 must file by 1 January 2024. Reporting companies formed on or after 1 January 2024 must file within 90 days of formation. Reporting companies that lose an exemption must file within 30 days of losing the exemption. Individual states, including New York, have enacted or may enact similar legislation requiring disclosures regarding beneficial owners of business entities.