USA Law and Practice Contributed by: Richard L. Rosen, Leonard S. Salis and Dennison Marzocco, Rosen Karol Salis PLLC
other entities, and have minimal record-keep - ing 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 partnerships. High-end commercial real estate investments are often structured as limited partnerships, with a general partner (GP) managing the part - nership and limited partners (LPs) contributing capital but not participating in management. The GP has unlimited liability, and even though it is frequently an entity, this is an obvious disadvan - tage. LPs are only liable for their invested capital. Limited liability limited partnerships (LLLPs) are a newer type of business entity that shield the general partner 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 liti - gation, making outcomes less predictable. While other entity types (C corporations or gen - eral partnerships) may be used for owning real estate in the USA, they are less commonly uti - lised than the types of entities discussed above, although C corporations 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 Forma - tion (or Articles of Organisation) with the state’s
secretary of state (or similar agency) and paying a fee. They are governed by an Operating Agree - ment, which is entered into by the entity’s “mem - bers” and covers a broad range of issues includ - ing economic rights, management and member rights (such as transferring interests or handling interests in the event of death or disability). If the LLC has a single member, the member manages the entity. If the LLC has multiple mem - bers, the entity may grant one member “day-to- day” control over the business (the Managing Member), or the entity may be “manager man - aged” where the entity is either managed 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 corpora - tion. Corporations, including S corporations, are typi - cally formed by filing a Certificate of Incorpora - tion (or Articles 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 share - holders. Limited partnerships are formed by filing a Cer - tificate of Limited Partnership with a state’s sec - retary of state (or similar agency) and paying a filing fee. Limited partnerships are governed by a limited partnership agreement that outlines each partner’s roles and responsibilities, as well as how they share in the profits and losses of the business, which results in tax ramifications for the partners. 5.3 REITs REITs invest in real estate, leasing and collect - ing rental income. REITS are subject to complex tax rules and regulations, and they may provide
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