When you undertake a real estate development project, you may decide to form a new legal entity, such as a corporation or LLC, to hold the project’s assets. Forming a separate entity for your project can offer various benefits for tax planning or liability management. A corporate attorney can help you determine a suitable legal structure for your Wisconsin real estate project based on your needs, concerns, and goals.
Why Entity Choice Matters in Real Estate
The type of entity you choose for a real estate development project can affect various legal and financial interests, such as personal liability, project financing, and taxes. Isolating a specific real estate project into its own legal entity can help protect your other real estate interests and your personal wealth, depending on the type of entity you choose. Furthermore, entity selection can matter due to the need to comply with Wisconsin business and real estate laws.
Common Entity Types for Wisconsin Real Estate Projects
Real estate developers in Wisconsin may choose to organize projects under common legal structures such as:
- Sole proprietorship: A real estate developer may choose to own assets related to a real estate project personally. Although sole proprietorships offer maximum simplicity as the project does not require a separate legal structure, personally owning real estate project assets means having no liability protection.
- General partnership: Developers who partner together for a real estate project may choose to form a general partnership, which allows developers to share control and profits. However, partners in a general partnership bear full liability for the partnership.
- Limited partnership: Developers sometimes organize real estate projects under a limited partnership, especially when seeking investors for the project. The limited partners have minimal control over the partnership but enjoy liability protection, while the general partner(s) control the partnership’s activities.
- Limited liability company: Developers frequently utilize LLCs for real estate projects due to their flexibility in structuring ownership and management, as well as the fact that LLCs offer limited liability protection and pass-through taxation.
- Corporation: Corporations have downsides for real estate projects, including more complexity in management structure and double taxation (as real estate corporations may not qualify for Subchapter S taxation). However, corporations may work for larger real estate developments or projects operating as REITs.
Key Considerations When Choosing an Entity
Some of the considerations that real estate developers should keep in mind when choosing a legal structure for their project include:
- Liability protection: Certain types of legal structures offer developers liability protection from civil judgments or defaults on debts (if the developer does not personally guarantee loans taken out by the project).
- Tax implications: Real estate projects may incur various types of tax liabilities, including depreciation, income taxes, and capital gains taxes, which can affect entity selection as developers seek to manage or mitigate their tax liabilities.
- Investment goals: Selecting an entity for a real estate project may depend on whether the owner(s) intend to make a short-term flip of the project or plan to hold onto the development indefinitely.
- Ownership structure: The choice of entity may depend on whether a project’s ownership includes a solo investor, partners, or a team financed by passive investors.
- Ease of formation and operation: Real estate developers may prefer entities with less complicated formation or operation, especially when working alone and not requiring formalities to protect their interests, as they might when collaborating with partners.
Contact a Wisconsin Real Estate Attorney Today
Selecting a suitable form of corporate structure can help protect your rights and interests in a real estate development project. Contact Farrow Legal today for a confidential consultation with a real estate lawyer to discuss your Wisconsin real estate project and evaluate which type of legal structure best serves your needs and objectives for your project.