There are 5 ownership structures available for those wanting to invest in real estate. Picking the right one for your situation
The 5 real estate ownership structures are:
Sole ProprietorshipsA sole proprietorship is the most basic form of business organization and exists whenever an individual carries on business for his or her own account without the involvement of other individuals, except as employees. It is relatively inexpensive to set up and require few legal formalities. All benefits flowing from the business, such as income and assets, accrue exclusively to the sole proprietor, and correspondingly, all obligations including losses, and liability associated with the business are also the sole proprietor's responsibility. A major disadvantage of sole proprietorships is that there is no limited liability for the sole proprietor; all business and personal assets may be seized in satisfaction of the sole proprietor's business obligations and liabilities. The sole proprietor can limit his or her personal liability exposure by contract or through insurance.
Corporations
A corporation is the most common form of business organization. A corporation is a legal entity separate in law from its owners and can own property, carry on business, possess rights, and incur liabilities. Although the shareholders own the corporation through their ownership of shares they do not own the property belonging to the corporation, and the rights and liabilities of the corporation are not the rights and liabilities of the shareholders. Shareholders' liability is limited to the value of the assets they have transferred to the corporation (in the form of money, property, or past services) in exchange for shares. If a corporation incurs liabilities in excess of the value of its assets, its creditors can demand to be repaid from the assets of the corporation but have no further recourse for the unpaid liabilities. As a separate legal entity, a corporation's income is determined and subject to tax separate from that of its owners, the shareholders. A shareholder cannot treat the net income or loss of a corporation in which he or she owns shares as his or her income or loss. A corporation's net income is subject to tax each year. If any of the corporation's after-tax income is to be paid to its shareholders, the directors may declare a dividend to the corporation's shareholders. Paying dividends is not a deductible expense to a corporation. However, dividends do constitute income (from property) to shareholders who are individuals, and this income is generally taxed again, usually at lower rates. A corporation can be used when only one individual is involved or if there is more than one individuals involved in the business. When more than one shareholder is involved, it may be advisable for those shareholders to enter into a shareholder agreement that governs certain aspects of the relationship such as exit strategies and the sale and transfer of shares. Other business structures that can be used if there is more than one person involved in the business are partnerships, joint ventures and trusts.
Partnerships
When two or more persons, whether individuals or corporations, carry on business together with a view to profit, the relationship is called a partnership, and the members of the partnership are called partners. A partnership is like a sole proprietorship in that it is relatively inexpensive to set up, there are few legal formalities required to create it, and the partners carry on the business themselves directly, since the partnership is not a legal entity separate from its partners. The laws of Ontario recognize three types of partnerships: general partnerships, normally just called partnerships; limited liability partnerships (LLPs); and limited partnerships. In Ontario, general partnerships and LLPs are governed by the Partnerships Act whereas limited partnerships are subject to the requirements of the Limited Partnerships Act. LLP's are not usually utilized for investment in real estate as they are typically used by groups of professionals who may not be permitted to incorporate and obtain full limited liability. In a general partnership, the liability of each partner for the debts and other obligations of the partnership is unlimited. This is in contrast to limited partnerships. In a limited partnership, there are one or more "general partners" whose liability is unlimited and one or more "limited partners" whose liability is limited to the amount they have contributed or agreed to contribute to the partnership business, as stated in the record of limited partners.
Joint Ventures
There is no precise legal definition for joint ventures. Generally a joint venture is an association of two or more persons for a limited purpose without the participants becoming partners. It can also be defined as any combination of resources by two or more persons in order to conduct a commercial venture jointly under agreed upon rules. Whatever the relationship among them, in most cases, the co-venturers should have a written agreement setting out the rules by which the venture will be governed. Matters to be considered in such agreements include:
the nature of the commercial activity in which the joint venture will engage; the contribution of each co-venturer; each co-venturer's share in the profits and losses; the duration of the joint venture; the management arrangements; and the dissolution of the joint venture.
The provisions accepted by the co-venturers are implemented by including them in the joint venture agreement or, if a joint venture corporation is utilized, in a separate shareholder agreement. Trusts
In simple terms, a trust is is a relationship whereby property (including real, tangible and intangible) is managed by one person (or persons, or organizations) for the benefit of another. There are several different types of trusts. Trusts frequently appear in wills. Consider a situation where the testator's assets are left to his or her children. If the children are under 18, or under some other age mentioned in the will (21 and 25 are common), a trust must come into existence until the contingency age is reached. The executor of the will is (usually) the trustee, and the children are the beneficiaries. The trustee will have powers to assist the beneficiaries with the management of the property during their minority.
The information provided above is intended to provide a general overview of the various types of structures that can be used when investing in real estate. One should speak with a legal advisor to determine the optimal structure for his or her situation.
Mike Henley is an associate in the corporate commercial group at the Guelph Lawyers office for Miller Thomson LLP. If you are buying or selling residential or commercial property in Guelph, and need a Real Estate Lawyer in Guelph, Mike is personable to deal with, thorough, and is backed by a highly sought-after and reputable firm to help make sure that your closing goes smoothly, is error free, and is on time.
