USA Law and Practice Contributed by: Richard L. Rosen, Leonard S. Salis and Dennison Marzocco, Rosen Karol Salis PLLC
5. Investment Vehicles 5.1 Types of Entities Available to Investors to Hold Real Estate Assets Real estate investments in the USA may be held in virtually any type of legally recognised business entity. Entity structuring has three main components: compli - ance, legal and tax. In the authors’ experience, most real estate owners or investors prefer using either a limited liability company (LLC), a “subchapter S” corporation or a limited part - nership as their entity. While these entities offer similar benefits, certain nuances apply. Choosing the type of business entity to be utilised should be explored with knowledgeable professionals such as an attorney and an accountant. LLCs are popular among real estate investors for their “pass-through” taxation, limited liability, asset protec - tion and flexibility in operations and profit distribution. However, they also offer easier transferability of own - ership compared to other entities, and have minimal record-keeping requirements. These benefits enhance their popularity. S corporations are tax-designated entities under the Internal Revenue Code, suitable for real estate investors aiming to quickly profit from property flips. They also offer limited liability and asset protection, but have limitations compared to LLCs, such as a 100-shareholder limit and a single class of stock. S corporations also require more formal management and record-keeping than LLCs and limited partner - ships. High-end commercial real estate investments are often structured as limited partnerships, with a gen - eral partner (GP) managing the partnership and limited partners (LPs) contributing capital but not participat - ing in management. The GP has unlimited liability and, even though it is frequently an entity, this is an obvious disadvantage. LPs are only liable for their invested capital. Limited liability limited partnerships (LLLPs) are a new - er type of business entity that shields the general part - ner from personal liability, but are not yet widely used
or recognised in all states. With 31 states and some territories allowing LLLPs, there is less legal precedent for LLLP-related litigation, making outcomes currently less predictable. While other entity types (C corporations or general partnerships) may be used for owning real estate in the USA, they are less commonly utilised than the types of entities discussed above, although C corpo - rations are typically used when the “investor” is a 401 (k) retirement fund. 5.2 Main Features and Tax Implications of the Constitution of Each Type of Entity LLCs are formed by filing a Certificate of Formation (or Articles of Organisation) with the state’s Secretary of State (or similar agency) and paying a fee. They are governed by an Operating Agreement, which is entered into by the entity’s “members” and covers a broad range of issues including economic rights, management and member rights (such as transferring interests or setting forth the rights or obligations of the members in the event of death or disability). If the LLC has a single member, the member manages the entity. If the LLC has multiple members, the entity may grant one member “day-to-day” control over the business (the Managing Member), or the entity may be “manager managed” where the entity is either man - aged by a non-member manager or by a board of directors or board of managers, which may delegate day-to-day authority to officers, as with a corporation. Corporations, including S corporations, are typically formed by filing a Certificate of Incorporation (or Arti - cles of Incorporation) with a state’s Secretary of State (or similar agency) and paying a filing fee. They are governed by by-laws for directors and shareholders, and often require annual (or more frequent) meetings of the shareholders or directors. Corporations fre - quently have more than one class of stock, such as voting or non-voting “preferred” shares. Limited partnerships are formed by filing a Certifi - cate of Limited Partnership with a state’s Secretary of State (or similar agency) and paying a filing fee. Limited partnerships are governed by a limited part - nership agreement that outlines each partner’s roles
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