USA – TEXAS Law and Practice Contributed by: Taylor Cooksey, Philip Kinkaid, Serena Kramer and David Brooks, Cokinos | Young
5.2 Main Features and Tax Implications of the Constitution of Each Type of Entity Although title to Texas real estate is typically acquired and held in a single-asset LLC, the investment or operating “vehicle” that owns such titleholding entity can take many forms. The most common in Texas are the: • LLC; • limited partnership; or • corporation. All of these entities may have one or more own- ers, except that a limited partnership must have at least one general partner and one limited part - ner. The general partner is typically an LLC but could be a corporation, which may be wholly owned by one or more limited partners. In each case, all owners are protected from the entity’s liabilities, except that the general partner of a limited partnership has no such protection. Using a special-purpose LLC or corporation as the general partner, however, accomplishes the same goal. All of these entities are subject to the Texas fran - chise tax, which is based on the entity’s marginal revenue. Regardless of which type of entity is used, the most important question is usually what clas - sification the entity will have for federal income tax (FIT) purposes – either by “default” (auto - matically) or by “election” (through a voluntary filing with the IRS). The four principal federal tax classifications are as follows. Disregarded Entity The entity is disregarded for FIT purposes, with its assets and income attributed to its sole own - er. This is the default classification of:
• an LLC with a sole owner; or • a limited partnership with a sole limited partner, and a sole general partner that is a disregarded entity of the sole limited partner. Partnership The entity is “pass-through” for FIT purposes: its owners pay FIT on the entity’s income, but the entity itself does not pay FIT. This is the default classification of an LLC with multiple owners, or a limited partnership that is not a disregarded entity. S Corporation Like a partnership, the entity is “pass-through” for FIT purposes. However, there are strict fed - eral requirements regarding owners and shares that must be met in order to elect and maintain this classification. This classification may be elected by any cor - poration, LLC or limited partnership, if it meets the requirements. C Corporation The entity is subject to federal “double taxation” : it pays FIT on its income, and its owners pay FIT on dividends they receive from the entity. This is the default classification of a corporation. This classification may also be elected by any LLC or limited partnership. 5.3 REITs A real estate investment trust must be formed as a corporation or trust and must meet federal REIT rules, including the distribution of at least 90% of its income to its shareholders. There is no tax at the entity level, with income passing to the shareholders and dividends being deductible
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