What's is the best business entity (C, S, LLC, or else) for holding raw land for a period of long time?

Question

I am thinking to purchase raw land in an un-developed area. Then hold the land as long as I could to wait for the development. The land will be passed to next generations until the area is being developed (it could be a few decades). I am wondering what's the best business entity to hold the raw land so that I can gradually transfer the interests on the entity to the next generation ?

Answer 1

PassionFruit,

Here is an explanation of the different types of business organizations:

A sole proprietorship has the least amount of expense and headaches to setup and operate, but the also the least amount of liability protection. If you go bankrupt as a SP you must declare personal bankruptcy. Income and losses are taxed to you personally and also completely subject to Self Employment tax (SET) of 15%.

An LLC is an option that offers liability protection and is an organization that is more difficult to set up and operate than an SP but less than a Corporation. Income is taxed on your personal tax return as a "pass through". These taxes may be higher if you have income right away, but if you have losses they are deductible against ordinary income on your tax return. SET is due on your salary, but not necessarily on company profits.

An S- corporation has the same tax status as an LLC but is more complicated to setup and operate. If offers liability protections.

A C-Corp is the most complicated to setup and operate, but income is taxed at the corporate rates which can be less than the personal rates. If you sell assets from a C -Corp and then want the money for yourself, it will be taxed twice - once in the corp and once personally. But if you sell the entire business, you get the lowest possible tax rate, capital gains tax, currently 15%.

In short since you will have early losses (expenses such as taxes and maintainence on the land) and need liability protection do an LLC.  It has the smallest costs intially and ongoing.  Make sure that you purchase the land in the LLC - do not own land personally or in a SP- if land ever has environmental problems, you  are personally liable even if someone else did the poluting.  Essential to do this deal in an LLC from the get go.

Transferring to family is also easiest with LLC.

Good Luck,

Dana B - President

www.thebarfieldgroup.com