Real Estate Investment Real Estate Investment

Chapter 9Chapter 9

Business OrganizationsBusiness Organizations

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© 2011 Cengage Learning

Key TermsKey Terms

Common stock

Corporation

Joint-stock company

Joint venture

Limited liability company

Limited partnership

Partnership

Preferred stock

S corporation

Sole proprietorship

Syndicate

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Sole Proprietorship

The simplest form of business organization is the sole proprietorship.

No protection against financial losses or claims that may arise from the operation of the business.

Potentially liable for the satisfaction of a judgment or lien.

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Sole Proprietorship

Income Tax Reports for a Sole Proprietorship.Accounting Method Used for a Sole Proprietorship.Disposition of a Sole Proprietorship

Capital assetsDepreciable property used in the businessReal property used in the businessProperty held as inventory or stock in trade

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Partnership

Formation of a PartnershipBy Oral Agreement

By Written Agreement

Partnership OperationsLiabilities

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Partnership

Disadvantages of a PartnershipUnlimited liability

Advantages of a PartnershipCombines capital and expertise

Partnership Income Tax ReportsGuaranteed Payments

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Distributive Items

Ordinary income or loss

Partner’s salary and interest

Gains and losses from property used in trade or business, and from involuntary conversions.

Qualifying dividends

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Distributive Items

Contributions

Net self-employment income

First-year asset expense option

Expense account allowance

Tax preference items

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Limited Partnership

The limited partnership puts a ceiling on the financial liability of each partner.

Disadvantages of a Limited Partnership

Advantages of a Limited Partnership

Limited Partnership Income Tax Reports

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Joint Venture

A JV is distinguished by how the property is owned.

Normally, each party in the venture holds an undivided share in the property.

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Limited Liability Companies

The LLC is a hybrid form of business ownership that incorporates the pass-through provisions of a partnership or Sub-S with the protections against liability of a corporation.

As with any corporation or indirect ownership form, this corporate “veil” is not a guarantee against liability.

Not a corporation

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Limited Liability Companies

Disadvantages of an LLCcompany’s bylaws need to address governance and liability issues, as well as such topics as the sale of member interests Generally more complex than a partnership.The LLC provides no special protection for the members from the debt of the LLC

Income Taxation and Other Advantages of an LLC

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Real Estate Investment Trusts

Types of REITsEquity REIT

Mortgage REIT

Hybrid REIT

Taxation and Regulation of REITs

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Real Estate Syndicate

A consortium of people or institutions that come together to share funding and/or expertise in a particular business endeavor that is often real estate investment or development.Regulations of a Real Estate Syndicate

The sale of a participating interest in real property can be considered a sale of securities. Both federal and state laws control the sale of securities to the general public

Require full disclosure of the facts by sellers of securities

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Corporations

The Corporate EntityThe Corporate StructureCorporations for ProfitNonprofit CorporationsDisadvantages of the Corporation

Double taxation

Advantages of the CorporationCorporate Income Tax Reports

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S Corporations

Like a hybrid between a corporation and a partnership

A normally chartered corporationno more than 35 shareholders Taxed as a partnership

The S corporation files an annual information return allocating its income among the shareholders.Advantages and disadvantages