Organizing Corporate Entities for Real Estate Purchases

Orland Park Attorneys Helping Clients Set Up the Right Real Estate Corporate Entity Structure

Forming a corporate entity to own real estate is a common strategy among investors and landlords, offering significant advantages in terms of liability protection, privacy, and potential tax benefits. While seemingly complex, understanding the different entity types and the process of formation and maintenance is crucial for maximizing these benefits. At Pucher & Ranucci, we guide our clients through this process, ensuring they make informed decisions that align with their investment goals.

Why Use a Corporate Entity for Real Estate Ownership?

There are several compelling reasons to consider holding real estate within a corporate structure rather than under personal ownership. These benefits contribute to both the security and the profitability of real estate investments.

Liability Protection

One of the primary motivations for using a corporate entity is to shield personal assets from liability.

• If a lawsuit arises from the property (e.g., a tenant injury), the entity, not the individual owner, is typically liable.
• This separation protects personal assets like your home, savings, and other investments from being seized to satisfy a judgment against the property.
• This is particularly important for landlords, who face inherent risks associated with tenant occupancy.

Privacy

Corporate entities can offer a degree of anonymity in property ownership.

• Public records will typically list the entity’s name as the owner, not the individual’s.
• This can be valuable for individuals who wish to keep their real estate holdings private.
• While complete anonymity is difficult to achieve, using an entity adds a layer of separation.

Tax Advantages

While tax implications are complex and vary depending on the entity type, corporate structures can offer certain advantages. We help the client sort through these issues and, when necessary, we can refer you to a tax professional.

• Pass-through taxation (for LLCs and S-Corps) avoids the double taxation that can occur with C-Corps.
• Potential deductions for business expenses related to the property can be maximized.
• Proper structuring can facilitate strategies like 1031 exchanges.

Management and Ownership Flexibility

Corporate entities provide greater flexibility in managing and transferring ownership.

• Multiple owners can easily be accommodated, with clear ownership percentages defined in the operating agreement or corporate bylaws.
• Transferring ownership interests is generally simpler than transferring title to real estate held in individual names.
• The entity structure can facilitate estate planning and the smooth transition of ownership to heirs.

Choosing the Right Entity Structure in Illinois

The ideal entity structure for real estate ownership depends on individual circumstances, investment goals, and the number of properties and investors involved. At Pucher & Ranucci, we help our clients evaluate the various options.

Limited Liability Companies (LLCs)

LLCs are often the most suitable entity for small to medium-sized real estate investors and individual property owners. They combine liability protection with simplicity and flexibility.

• Benefits: LLCs offer limited liability, protecting personal assets; pass-through taxation, avoiding double taxation; and flexibility in management structure.
• Drawbacks: Members may be subject to self-employment tax on their share of the profits, and LLCs have less formal requirements than corporations, which can be a drawback in some situations.
• Best For: Small to medium-sized investors, individual property owners, and those seeking a balance between protection and simplicity.

Series LLCs

Illinois allows for the formation of Series LLCs, which offer a unique way to structure ownership of multiple properties.

• Benefits: Each “series” within the LLC can hold separate assets and have separate liability, providing enhanced asset segregation. This can also lead to cost savings in formation and administration compared to forming multiple separate LLCs.
• Drawbacks: Series LLCs are a relatively new concept, and not all states recognize them. This can create complications if owning property in other states.
• Best For: Investors with multiple properties in Illinois who want to isolate liability for each property without the expense of forming numerous separate LLCs.

Corporations (C-Corps and S-Corps)

Corporations are generally less common for direct real estate ownership, but they have specific use cases.

C-Corps:

• Benefits: Potential for certain tax strategies (e.g., retaining earnings at a lower corporate tax rate).
• Drawbacks: Subject to double taxation (profits taxed at the corporate level and again when distributed to shareholders).
• Best For: Large-scale real estate development companies or situations requiring specific tax planning strategies.

S-Corps:

• Benefits: Potential for self-employment tax savings for active real estate professionals (those who materially participate in the business).
• Drawbacks: More complex to set up and maintain than LLCs, with stricter compliance requirements.
• Best For: Real estate professionals who actively manage their properties and can benefit from the specific tax treatment of S-Corps. Not typically recommended for passive real estate investment.

Real Estate Investment Trusts (REITs)

REITs are a specialized type of entity for investing in real estate, typically on a large scale.

• Benefits: Provide access to real estate investment for smaller investors, high liquidity compared to directly owning properties.
• Drawbacks: Offer less control than direct, offer less opportunity for appreciation than direct ownership.
• Best For: Large-scale operations or for those who cannot afford their own investments.

Forming and Maintaining Your Real Estate Entity

Regardless of the chosen entity type, there are certain essential steps involved in formation and ongoing maintenance. At Pucher & Ranucci, we guide our clients through each step.

Choosing a Name and Registered Agent

The first step is selecting a name for your entity and designating a registered agent:

• The entity name must be distinguishable from other registered entities in Illinois.
• A registered agent is a person or company designated to receive official legal and tax documents on behalf of the entity. The registered agent must have a physical address in Illinois.

Filing Formation Documents (with the Illinois Secretary of State)

The necessary formation documents must be filed with the Illinois Secretary of State.

• For LLCs, this is typically the Articles of Organization.
• For corporations, it’s the Articles of Incorporation.
• We assist our clients in preparing and filing these documents correctly.

Obtaining an EIN (Federal Tax ID)

An Employer Identification Number (EIN) is a federal tax ID required for most entities.

• The EIN is obtained from the IRS.
• It’s needed to open a bank account for the entity and for tax filing purposes.

Creating an Operating Agreement

An operating agreement is a crucial internal document that governs the operation of the entity.

• It outlines the ownership structure, management responsibilities, and financial arrangements.
• Even for single-member LLCs, an operating agreement is highly recommended to establish the separate legal identity of the entity.
• We work with our clients to draft comprehensive operating agreements tailored to their specific needs.

Ongoing Compliance (Annual Reports, etc.)

Maintaining compliance with state requirements is essential to keep the entity in good standing.

• Illinois requires annual reports to be filed for most entities.
• Proper record-keeping, including maintaining minutes of meetings (for corporations) and financial records, is crucial.
• We assist our clients to ensure compliance.

Transferring Existing Property to Your Entity

If you already own real estate, transferring it to a newly formed entity requires careful consideration.

Deed Preparation and Recording

A new deed must be prepared and recorded to transfer ownership from the individual to the entity.

• The deed must accurately reflect the transfer of ownership.
• It must be properly executed and recorded with the county recorder’s office.
• We handle all aspects of deed preparation and recording.

“Due on Sale” Clauses and Existing Mortgages

Transferring property with an existing mortgage can trigger a “due on sale” clause.

• This clause allows the lender to demand full repayment of the loan upon transfer of ownership.
• While the Garn-St. Germain Depository Institutions Act of 1982 provides some exceptions (particularly for transfers to certain types of trusts and LLCs for residential properties), it’s important to review the mortgage terms and potentially obtain lender consent before transferring the property.

Potential Tax Implications

Transferring real estate to a business may bring about tax obligations.

• Depending on the transfer, the property may be subject to real estate transfer taxes.
• The transfer could have other tax consequences. It’s best to have a CPA advise on this.

Work with Experienced Orland Park Real Estate Attorneys

At Pucher & Ranucci, we have nearly two decades of experience helping clients structure their real estate holdings for optimal protection, privacy, and tax efficiency. Our emphasis on communication and education ensures that our clients are active participants in the process, understanding the complexities and making informed decisions. We build a cohesive partnership with our clients, providing ongoing support and guidance long after the initial entity formation is complete.

Contact us today for a personalized consultation to discuss your real estate goals and the right entity structure under which to achieve them.

We represent clients in Orland Park, Tinley Park, Joliet, Oak Forest, Alsip, Palos Heights, Homer Glen, Mokena, Will County, Cook County, and the surrounding Chicagoland areas.