People form different types of businesses for different purposes. A corporation is a very common form of business ownership in the United States because it offers its owners some important advantages. In fact, there are two different types of corporations recognized in the U.S.: the S corp and the C corp. Sometimes people contemplate using an S corporation to purchase real property. But is this a good idea?
Type of Corporations
A corporation is a limited liability entity that is treated as a legally separate "person" from its owners. This means that the owners of a corporation aren't personally responsible for the debts and obligations of the corporation except to the extent of their investment in the business. The difference between a C corporation and an S corporation is the way the IRS treats it for tax purposes. An S corp's income is "passed through" to its owners and taxed only at the individual level.
Authorized Corporate Activities
Corporations are creatures of statute and their rights, powers and authority are statutory. To determine the scope of a corporation's authority, you simply have to look up the relevant corporate statute in the state where the corporation is organized. Generally speaking, corporations in all states have the right to engage in most lawful business activity. Engaging in purchases of residential real estate clearly falls within a lawful business activity that corporations can pursue.
Manner of Corporate Purchase of Property
Since a corporation is an entity, it must act through its authorized representatives -- its board of directors and officers. To purchase real estate, a corporation must authorize someone to purchase the property on its behalf. It does this either through its bylaws or a corporate resolution passed by its board of directors. Lenders and sellers usually require written proof of the authority of the representative to purchase the property, such as a certified copy of the corporate resolution authorizing the purchase.
Consider Alternative Purchase Vehicles
While you can certainly use an S corp to buy residential property, you may want to look at other business forms as well. A good alternative to compare is a limited liability company -- LLC. An LLC provides its owners the same limited liability as an S corp, but with far less complexity of management and more flexibility in operations. You may wish to consult with a business attorney or accountant to determine which entity is best for your purposes.
- S Corporations Explained: Can I Use an S Corporation for Real Estate Investing?
- The Free Dictionary: Corporation
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Shawn M. Grimsley holds a bachelor's degree in political science, master's degree in public administration and a Juris Doctor. He practiced law for 10 years, focusing on general business law, securities law, real estate and civil litigation. Grimsley now serves as a teacher and writer.