There are several ways to hold the title to a property. Some are simple; some are complex. Each has its advantages and disadvantages, so you have to decide which one is right for you. In this article, I’ll describe the most common forms of title holding and the advantages and disadvantages of each.

Sole Proprietorship

This is most common form of ownership. All you need is a title of the property vested in your name (or other designated person). A sole proprietorship has several advantages:
·         It’s the easiest and cheapest form of ownership.
·         You have complete control and decision-making power over the business.
·         The sale or transfer of property can take place at your discretion.
·         There are no corporate tax payments.
·         There are minimal legal costs to forming a sole proprietorship.
·         There are few formal business requirements.As with any form of title holding, a sole proprietorship also has its disadvantages:
§         You can be held personally liable for the debts and obligations of the business. This means you have no protection against lawsuits or other claims.
§         All responsibilities and business decisions fall on your shoulders.
§         There are no significant tax advantages.
·         All your income and expenses are reported directly on your personal tax return.
·         In the event you die, there is no favorable tax treatment or avoidance of probate.

Joint Tenancy

This is a form of ownership by two or more individuals together. It’s different from other types of co-ownership in that the surviving joint tenant immediately becomes the owner of the whole property upon the death of the other joint tenant. This is called a “right of survivorship.”  A joint tenancy between a husband and wife is known as a tenancy by the entirety. This form has some characteristics different than other joint tenancies, such as the inability of one joint tenant to sever the ownership and differences in tax treatment. A joint tenancy requires a unity of time, title, interest and possession.“Unity of time” means that all the joint tenants must take title by the same deed at the same time. Each tenant must own an equal interest or percentage of the property. So, if you have two joint tenants, they each own 50%; three joint tenants 331/3%; and so forth. If the percentage or interest is unequal, then it’s not a joint tenancy. By law, each joint tenant is entitled to the right of possession and can’t be excluded by the others. A judgment lien or bankruptcy can terminate a joint tenancy. A new joint tenant can be added by executing a new deed. Here are the advantages of a joint tenancy: 

• You get a stepped-up basis on your deceased joint tenant’s portion of the property. “Stepped up” means that the taxable basis is increased for the portion of the property owned by the deceased joint tenant to the current market value at the time of death. This means that the surviving joint tenants may be able to sell the property with much lower taxes.
• Married couples often hold title to investment properties in a joint tenancy. If one spouse dies, this can result in a step up in basis to the fair market value at the time of death rather than just a step up for the portion owned by the deceased joint tenant. Laws on this subject vary from state to state and may include additional options.

 There are also disadvantages to a joint tenancy:
·         The co-owners may disagree or quarrel. If they do disagree, an expensive and time consuming law suit may be required for the original owner to exercise his or her intentions for the asset.
·         If an asset is owned prior to marriage, the original owner may lose part of the asset in a divorce.
·         A jointly owned asset will be subject to judgments against every owner and may be lost in the bankruptcy of any owner.
·         The financial management advantages of trusts are eliminated, especially where aged parents or minor children are involved, as are the possible tax-savings features of trusts and estates.
·         Assets may not be available to the executor of a deceased joint owner’s estate. In such a situation, it may then be necessary to sell other assets, possibly at a loss, in order to meet tax payments or other cash needs to settle the affairs of the deceased.
·         The one who originally owned the property, and subsequently places it in a joint tenancy, is no longer the sole owner.
·         If the original owner later desires to dispose of the property, in many cases he or she can sell only his or her part interest unless the other joint tenants agree and cooperate.
·         If both joint owners die in a common accident or disaster and it cannot be determined who died first, serious legal problems and an increase in the cost of probate may result.
·         If a conservator is appointed for the original owner, the probate court’s authority may be required to use the asset for that owner, increasing the cost of the conservatorship.
·         If minors or legally disabled adults are involved, expensive conservatorship proceedings may be necessary.

Tenancy in Common

This is an arrangement in which several owners each own a stated portion or share of the property. It has the following advantages:

• Each owner can own a different percentage, can take title at any time, and can sell his or her interest at any time.
• If you’re an owner, you also have complete control over your part of the property and can sell, bequeath or mortgage your interest as you decide without any need for permission of the others.
• Upon your death, your share becomes part of your estate, and you can will it as you see fit.

 Here are the disadvantages:

• If another owner dies, you may find that he or she has left their interest to someone you dislike or can’t get along with.
• Another owner can sell or borrow against his or her property.  This can create conflicts.
• Financial difficulties of another owner or owners can badly affect your interest in the property.
• If an owner had a judgment leveled against him or her, it could lead to foreclosure on their interest in the property.
• Or a bankruptcy proceeding could order the forced sale of the property to satisfy creditors, unless you and the other owners are willing to pay off the creditors and buy out the owner in question.
• Different owners may have different plans for the property.  This can lead to strife among the tenants in common. Some may want borrow money using the property as collateral; others may want to sell the property, etc. If no one can agree, a business feud can erupt into legal action and the resulting nastiness and expense.

Partnerships

As the name suggests, partnerships consist of two or more partners who join together to acquire, operate and hold real estate. It’s an effective way of pooling capital and talent. A key feature of a real estate partnership is that the investors don’t actually have the title or ownership directly in acquired properties. Instead, they own a partnership interest. Partnerships usually take two forms—general and limited.

General partnerships

In this setup, each partner possesses the right to fully participate in property management and operations. General partnerships have the following advantages:

• They’re easy to set up and maintain. You don’t have to register with your state and pay fees, as you do to establish a corporation or limited liability company (LLC).
• You can file income tax returns with relative ease. This is because a general partnership is normally a “pass through” tax entity. This means the partners, not the partnership, are taxed.
• Unlike a regular corporation, there’s no need to file separate tax returns for the corporate entity and its owners.
• General partnerships offer flexibility. Partners are able to set their responsibilities and benefits as they see fit or as the needs of the business dictate. The flexibility extends to distribution of profits and losses. So, for example, an individual partner can reap higher profits for taking on more financial risk.
• A partnership is considered a “discrete’ asset. Because of this, it can be transferred to other people, heirs, or estates unlike a sole proprietorship. Transference is usually limited by the terms of the partnership agreement.

 There’s one primary disadvantage of general partnerships:

• One business-related act of a partner can make all partners legally liable for that act. So it’s important that you enter into partnerships only with people you trust. Then back up that trust with a written partnership agreement that establishes the following: each partner’s share of profits or losses, day-to-day duties, and what happens if one partner dies or retires.

Limited partnerships

This ownership form differs from a general partnership in the role and responsibilities of the partners. It consists of one or more general partners and one or more limited partners. Typically, the general partners run the operations of the business while the limited partners provide capital and help arrange financing while not taking an active role in running the business. In return for their investment, they receive a share of the profits for their involvement as limited partners.  Statutes regarding limited partnerships vary by state so you’ll have to check with the appropriate government agency for a definition of the obligations and responsibilities of partners in this type of business arrangement. The partnership is required to file with the secretary of state and must also file various reports. A key feature of a limited partnership agreement lies in the area of liability, which falls on the general partners, and typically not on the limited partners. For this reason, individuals are reluctant to be general partners. The general partner of a limited partnership can itself be a corporation or LLC to lessen liability issues. However, this doesn’t mean that a limited partner can’t be part of, or have a vote in, major decisions that affect the partnership. Here are the advantages of a limited partnership:

• As a limited partner, you can invest even though you don’t have expertise or the time to devote to being a hands-on part of the business.
• You can take on the financial risk but not the liability risk.
• Partners are able to allocate profits, losses and gains as they see fit, regardless of the equity interest of a specific partner, subject to compliance with tax laws. The general partners prepare an IRS Form 1065 for the partnership. Each partner then prepares his or her own tax form listing all profits, losses and depreciations.
• It’s a “pass-through” operation with profits passing through to the partners who then include their allocated income on their personal tax returns.
• It’s much easier to attract investors as limited partners.
• It allows general partners to use their expertise, make key decisions and manage the business.
• Limited partners can leave the business or be replaced without the need for the limited partnership to be dissolved.

 Disadvantages of a limited partnership include the following:

• Filings, formalities and state requirements mean a lot of paperwork.
• If you’re a general partner, you assume personal liability.

Limited Liability Companies (LLCs)

This is hybrid form of ownership that combines the properties of a corporation and partnership. It has several advantages:

• It provides the flexibility and tax advantages of a partnership while maintaining the limited-liability benefits of a corporation.
• Like a corporation, an LLC is a separate legal entity that limits the liability of its members. However, it has the tax benefits of a partnership.
• LLCs are also free of many of the legal requirements that govern corporations (including annual reports, director meetings, shareholder requirements and so on).
• LLCs are a “pass through” tax entity, which means company profits and losses are passed through the business and taxed solely on the members’ individual tax returns.
• Members can hire a management group to run the LLC. This group can consist of members, nonmembers, or a combination.
• Members can split profits and losses any way they wish.
• Dividend distribution is nontaxable, unlike an S corporation, where dividends are taxable.
• An unlimited number of members may join a single LLC, and most states allow single-member LLCs.
• An LLC may affiliate with other businesses, unlike an S corporation, where that ability is limited.

 Disadvantages of LLCs include the following:

• Costs can be greater. Some states impose income or franchise taxes on LLCs or require LLCs to pay annual fees to operate in that state.
• Lack of legal precedent. Because LLCs have existed as legal business entities only since 1996, there’s not much legal precedent available to help owners predict how legal disputes may affect their businesses.
• Every state has its own requirements so check with an attorney who specializes in LLCs before deciding to form or join a limited liability corporation.

Corporations

Corporations are a legal entity owned one or more shareholders. They can be private or public like Ford, Microsoft, Federal Express, etc. As a real estate investor, you can create your own private or closely held corporation by filing articles of incorporation and bylaws with the appropriate state agency. Requirements for incorporation will vary from state to state. The primary advantage (among others) is limited liability for share holders. Since the owners of a corporation actually own stock and not the real estate, the most shareholders can lose is their equity investment. The disadvantage of a corporation relates to initial expenses:

• It costs money to have an attorney draw up the organizational documents.
• There are also costs to cover extensive reporting requirements at state and federal levels for maintaining corporate status.
• If these requirements aren’t meant or if there’s lack of capitalization, creditors or lien holders can seek personal liability from individual shareholders.

 There are two types of corporations:

C corporations

One advantage of this type of corporation is that it has continuity (it continues in the event a shareholder dies). It has two disadvantages:

• The major disadvantage of a C corporation is that it’s taxed twice–once when the business makes a profit and then a second time when those profits are distributed to shareholders.
• Another disadvantage is that if the corporation has losses, it has to carry them over to the next tax year because the shareholders can’t use C corporation losses on their personal returns.

S corporations

This type of corporation has the advantage of avoiding double taxation by passing all tax liabilities onto shareholders. As such, S corporations are only taxed once. However, they’re seldom used in real estate ownership because their primary disadvantage is that the liquidation of an S corporation is a taxable event. This means that even if the shareholders agree to an equitable distribution of assets, the Internal Revenue Service will consider the liquidation as taxable. The shareholders will then be forced to pay capital gains taxes and possibly sell some of the assets.  In addition, there’s the issue of material participation. This is an IRS term that indicates whether an investor worked and was involved in a business activity on a regular basis. It has a series of tests to determine material participation which affects the tax benefits you may or may not receive. Generally speaking, incorporation is an expensive choice for holding real estate assets if you’re an average real estate investor. You must be willing to pay for the professional, legal and accounting advice not only at the beginning but also on a continual basis. These expenses can mount up. You also have to deal with the hassle of ongoing technical requirements and the possible expensive possibility of double taxation. 

Key Point: Know your investment objectives and state and federal laws concerning title holding; then, select the form that best meets your investment needs.