Commercial and Residential real estate investors have a plethora of alternatives to select from when it comes to purchasing or investing in property or a piece of real estate. Each choice has its own advantages and disadvantages. Individual investors’ plans can significantly influence making an educated investment selection. It’s appropriate to involve with professionals like attorneys and accountants to arrive at a reasonable and well-informed decision through this process.
Among various alternatives, some of the ownership options to acquire and invest in real estate include following:
Sole Proprietorship
A sole proprietorship is a type of ownership in which one person owns and operates the business under their own name. The sole proprietor operates the business all by themself, single-handedly or in conjunction with others. One person is responsible for all obligations, is entitled to profits, and is held accountable for any losses experienced by the business as a sole proprietor.
Sole proprietorship comes with its own benefits as it is usually be initiated quickly and with minimal paperwork. And is easy to set up and at a low cost. Legal and accounting fees can be significantly lower than for other business entities. And it is also free from several provincial or government regulations imposed on incorporated corporations. Furthermore, tax advantages are more significant for this type of ownership than for other kinds of ownership based on income. But at the same time, having unlimited liability as the owner comes with its own drawbacks. If a business goes bankrupt, creditors may sue the owner and seize the owner’s personal assets that are not directly tied to the firm to recover the cost. The amount of capital and borrowing power available to a sole proprietor may serve as a ceiling on the company’s expansion. There is no distinction between the business’s profits and the owner’s personal income for tax purposes. Therefore all profits are considered regular income, and all profits are taxed as such. After the demise of a business owner, the executor or administrator of the estate dissolves the business.
Corporation
Articles of incorporation establish a legal business entity known as a corporation. From small, privately-owned businesses to publicly traded corporations, corporations come in a wide range of sizes. Unlike some other ownership types, a corporation establishes a legal barrier between the firm and its owner or owners. As the corporation is set up as a separate legal entity, it can merge and form new subsidiary companies for the most part. Owners’ liability is limited to the shares held. If a corporation is privately owned, the owner retains all the shares. The corporation remains in existence until the shareholders decide otherwise, like sell or close it.
Setting up and owning a corporation is hectic as it requires more time, paperwork, upfront and ongoing costs, and record upkeep. As the owner has no personal liability to the corporation, corporations are required to follow more corporate formalities. Gains earned by the corporation are taxed, as are profits gained by individual stockholders.
Partnership
A partnership can be roughly described as a collaboration between two or more people or entities with the goal of creating a profit together. Ownership is held in the personal names of the partners, much like in a sole proprietorship. Partnerships are more structural and contractual in nature, in which partners contribute funds and make efforts in order to achieve common goals. All partners are accountable for the activities of their fellow partners. For tax reasons, a partner’s income is computed at the partnership level, but after distribution, the revenue is added to the individual partner’s personal gain. Each member must also report the earnings and losses of the partnership. It is the easiest ownership option to enter but the most complex option to exit.
Limited Partnership
A limited partnership, as the name implies, is an investment arrangement in which a partner’s liability is limited to the amount of money invested. Limited partnerships must be officially registered and appoint one general partner with unrestricted responsibility. While the general partner receives a higher share of the company’s earnings in exchange for more significant contributions and risk exposure, the limited partner being a passive investor, their profit is limited. In terms of taxation, each partner is personally liable for the taxation of their respective shares. Partnerships, on the whole, are not required to file any tax.
Joint Venture
Several individuals or organizations form a joint venture to fund a real estate development project. Joint ventures are often limited in scope and duration. As a result, joint ventures’ legal and taxation, status might be murky at best, if at all. Joint ventures are sometimes referred to as co-ownerships, but they can also be similar to partnerships in that they involve the pooling of resources to purchase real estate or undertake another project.
