Why Create an LLC for Corporate Housing Shareholders?

by Heather Frances J.D. Google
LLCs offer tax advantages for real estate investors.

LLCs offer tax advantages for real estate investors.

Stockbyte/Stockbyte/Getty Images

Corporations are an ideal structure for many types of businesses, but you have many other structures to choose from, including partnerships, limited liability companies and sole proprietorships. Each structure offers certain advantages over the others, so a corporation may not necessarily be the best option for every situation. Because of certain advantages offered by an LLC, you may wish to consider it as the structure to hold your business property.

Ready to start your LLC? Start an LLC Online Now

Corporate Housing

Generally, “corporate housing” is a term used to describe apartment-style extended stay housing for employees living in an area temporarily for business purposes. For example, if a company regularly sends employees to a certain location for a few months at a time, the company may wish to buy housing for employees in the area to avoid the expense and inconvenience of renting hotel rooms. Corporate housing can be used for one business's employees or shared by several businesses. In such situations, a business can create a separate LLC for the purpose of holding and operating corporate housing; once formed, the LLC then leases the property back to the corporation for the employees’ use.

LLCs

An LLC combines the limited liability protection of a corporation with the tax efficiencies and flexibility of a partnership. Like corporate shareholders, an LLC’s owners, called members, are protected from personal liability for business debts and activity. Like partnerships, LLCs are not taxed as a business. Instead, income and losses are passed through to members for inclusion on their personal income taxes or, if a member is a corporation, the corporation's taxes. LLCs are governed by state law, but states generally require LLCs to file articles of organization with the state business registrar before operating as an LLC.

Advantages and Disadvantages

In addition to liability protection, LLCs require less record keeping than corporations and have lower startup costs. Members of an LLC also have more freedom when dividing profits. When it comes to owning property, an LLC’s greatest advantage is its single pass-through taxation, which allows members to include profits from the sale of real estate on their personal taxes rather than being taxed once at the business level and again at the personal level through the corporation structure. For example, if you sell property owned by a corporation, the corporation must pay taxes on the profit, or capital gain, from the sale at the corporate tax rate. Then, as a shareholder, you must pay personal taxes on distributions you receive from the corporation based on that sale. Depending on your tax rates, you could lose a substantial amount of your profits through taxation if the real estate is owned by a corporation rather than an LLC.

Investors

Outside investors often see an LLC owning real estate as an attractive investment, particularly because of an LLC's tax benefits. Since LLCs can be owned by any type of entity, corporations, trusts and other entities can be members of an LLC. While S corporations offer the same tax benefits and liability protection as LLCs, they are not as flexible when it comes to investors since they can only be owned by certain entities. For example, other corporations and partnerships cannot be shareholders in an S corporation; therefore, corporations and partnerships could not invest in real estate owned by an S corporation.