USA – NORTH CAROLINA Law and Practice Contributed by: John Livingston and Brittani Miller, Kilpatrick Townsend & Stockton LLP
5. Investment Vehicles 5.1 Types of Entities Available to Investors to Hold Real Estate Assets Investors have several entity options for holding real estate assets, including the limited liability company (LLC), which is commonly used due to its flexibility, limited liability for members and favourable tax treat- ment. Individuals, corporations, non-profit corpora - tions, limited partnerships and other less common entities can hold real estate as well. Other options are the real estate investment trust (REIT), suitable for large-scale or institutional real estate investments with tax advantages but complex compliance require - ments, and the limited partnership (LP), where limited partners have liability protection but general partners do not. 5.2 Main Features and Tax Implications of the Constitution of Each Type of Entity LLCs For LLCs, the main features and tax benefits and costs are as follows. Main features • Members enjoy limited liability, meaning their per - sonal assets are protected from the entity’s debts and liabilities. • LLCs are flexible in terms of ownership, profit allo - cation and management structures. • Can be member-managed (owners manage the business) or manager-managed (designated man - agers handle operations). Tax benefits and costs • LLCs are taxed as pass-through entities by default, meaning profits and losses flow directly to mem - bers and are reported on their personal tax returns, avoiding corporate-level taxation. • LLCs can elect to be taxed as a corporation (C-Corp or S-Corp) for specific tax advantages. • Members of an LLC may be subject to self- employment taxes on their share of profits if taxed as a partnership. • Moderate. Filing fees for Articles of Organisation are USD125, plus annual reports costing USD200. • LLCs allow for deductions related to certain expenses.
REITs For REITs, the main features and tax benefits and costs are as follows. Main features • Shareholders have limited liability. • Managed by a board of directors or trustees; investments are pooled and professionally man - aged. • Must have at least 100 shareholders and cannot have more than 50% of shares owned by five or fewer individuals. • Must distribute at least 90% of taxable income to shareholders as dividends. Tax benefits and costs • REITs are generally exempt from corporate income tax if they meet regulatory requirements, including distributing 90% of taxable income. • Shareholders are taxed on dividends received, which may be taxed as ordinary income or qualify for preferential tax rates. • REITs require significant legal and administrative costs to meet Internal Revenue Service (IRS) and Securities and Exchange Commission (SEC) com - pliance, including public reporting and shareholder requirements. LPs For LPs, the main features and tax benefits and costs • General partners have unlimited liability, while limited partners have limited liability and are not involved in management. • General partners manage the partnership, while limited partners are passive investors. • Flexible ownership structure, with profit allocations set by the partnership agreement. Tax benefits and costs are as follows. Main features • Income and losses are passed through to partners. • General partners are subject to self-employment taxes; limited partners are not taxed on passive income. • Filing fees for Certificates of Limited Partnership are USD50.
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