Real Estate Development: Structure Comparison

Real-Estate-Development-Structure-Comparison

This summary compares the attributes of structuring a real estate development project through a Corporation or a Limited Partnership.  Particularly relevant when there are external investors as part of the ownership group.

 

Corporation

Limited Partnership (LP)

Ownership

All owners (whether active in the development or passive investors) would be shareholders of the corporation.  There is significant flexibility in terms of which classes of shares each owner holds and the attributes attached thereto

One owner needs to be the General Partner (GP) and all other owners would be Limited Partners (LPs).  Allocations of income and attributes of owners would be prescribed by the statute authorizing the creation of the LP (ie. Partnership agreement)

Management control

Shareholders would appoint the directors of the corporation and the directors would determine management control and be responsible for oversight

GP has management control and bears additional risk (often this is mitigated by creating a corporation to act as GP and allocating a very minimal percentage of the overall partnership to the GP)

Set up costs

Incorporation costs, shareholder’s agreements

Partnership agreements

On-going obligations

Annual accounting and tax filing

Annual accounting and tax filing

Liability

Liability is not extended to the owners, but limited to the assets of the corporation (except in certain situations where the shareholders have provided personal guarantees on financing)

GP has unlimited liability.  LPs liability is limited to their net contribution to the LP (as long as the LPs are not part of the control and management of the partnership)

Financing

Taken out at the corporate level.  Only guaranteed by owners if needed (some or all of the owners depending on circumstances)

GP guarantees all financing.  LP investors are not included on the financing but occasionally are required to guarantee financing if required by the financial institution

Income and taxes

Income earned is contained inside the corporation and taxed at the corporate business tax rates (26.5% regular business rate or 12.5% Small business rate (Ontario))

Income is attributed to each owner annually based on their proportionate share in accordance with the partnership agreement.  Income is then taxed in the hands of the owners at their marginal tax rates

Losses

Losses incurred are trapped inside the corporation and are only able to be offset against future income inside the corporation

Losses (like income) are attributed out to each owner annually based on their proportionate share and can be used to offset other sources of income

Cash flow to investors

Distributing cash to investors is done in the form of repayment of any initial investments or taxable dividends (if shareholders are Canadian-Controlled Private Corporations and own over 10% of the Development Corp dividends can be paid on a tax free basis)

Distributing cash to investors is done as a distribution on the investor’s capital account.  These distributions are non-taxable provided there is sufficient Adjusted Cost Base (ACB) for the individual investor

Investor loans

Investors (shareholders) can loan funds to the corporation) these can be secured or unsecured.  These loans can also be interest bearing with terms of repayment or non-interest bearing and due on demand

Any money contributed from the investors would be in the form of capital contributions

In general, the main advantages of the LP structure are the ability to flow losses out to investors annually and the ability distribute more cash to investors.  The main advantage of the corporate structure is the tax deferral from a lower corporate tax rate.

This is meant as a high-level comparison and the choice in structure will depend on the facts of each particular situation.  

This summary has been provided for information only.  This does not provide specifics.  If you have questions or if you would like to discuss specifics of your particular situation, please contact your Welch LLP advisor.

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