USA – ALABAMA Law and Practice Contributed by: Adam J. Sigman, Crystal H. Walls, Nathan Stotser, Katie Sinclair and Courtney Bradshaw, Dentons
nerships (LPs), limited liability companies (LLCs) and real estate investment trusts (REITs) for the purpose of holding real estate. The most frequently used ownership entities in Alabama are LLCs and LPs (including limited liability limited partnerships). Generally, LLCs are preferred to LPs as investment vehicles because none of an LLC’s owners ( “members” ) is liable for the entity’s debts and obligations, while an LP is required to have at least one part - ner (the “general partner” ) liable for such debts and obligations. LLCs also have a potential tax basis advantage over LPs in qualifying for non- recourse basis treatment for an entity-recourse debt. Alternatively, an LP may be preferable if certain owners are not US citizens and if the requirements of their home country’s tax laws would impose additional tax burdens upon them otherwise. Both LPs and LLCs are usually preferred over corporations (other than REITs, as described below) because corporate income is taxed at the corporate level, and then the dividends paid to the corporate owners ( “shareholders” ) are taxed again. Corporations that own real estate often do so in connection with their trade or business (eg, factories). Other entity types can be used to hold real estate assets as well, such as S corpora - tions and general partnerships, but their use is infrequent due to taxation and liability concerns, respectively. 5.2 Main Features and Tax Implications of the Constitution of Each Type of Entity With respect to LPs and LLCs, almost all fea - tures of their operations are negotiated among the partners or members in an LP’s limited part - nership agreement or in an LLC’s limited liabil -
ity company agreement, including how and by whom decisions are made as well as how the economics are divided. Major decisions typically require the consent of the partners or members, and often include: • a sale or refinancing of the principal asset; • certain major leases; • construction matters, such as budgets and hiring of contractors; and • decisions affecting the continuation of the entity, such as merger, termination and bank - ruptcy. These agreements also establish the priorities of economic distributions and the payment of agreed-upon fees among the partners or mem - bers, providing for how and when additional capital may be called from the partners or mem - bers. It is important that these agreements prop - erly address income tax considerations, as the allocation of economic benefits and tax liabili - ties of ownership must comply with detailed US tax code regulations or risk unintended tax out - comes. Both types of agreement will generally have provisions allowing for certain owners to buy the interests of other owners or to have the assets sold under certain circumstances. Corporate Statutes and Judicial Decisions Many activities of corporations, including REITs, are governed by Alabama corporate statutes and judicial decisions. In closely held corpora - tions, the owners (shareholders) may enter into a shareholders’ agreement, which establishes, among other things, how votes are cast and how interests in the corporation may be bought and sold or otherwise transferred. Economic distributions within corporations are generally less flexible than distributions within LPs and LLCs. Each share in the same class
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