Can an S Corporation Buy Residential Property?
Corporations are either C corporations or S corporations. While taxes on profits are paid by C corporations, the usual corporate form for larger companies, S corporation profits are passed through to the corporation's owners, who pay taxes on those profits as ordinary income. S corporations are typically formed by individuals and small businesses. Buying residential real estate is a legal activity, and provided that the board of directors and stockholders do not object, an S corporation may buy residential real estate. Whether that is the best way to acquire residential real estate, however, is another issue.
An individual may form an S corporation that is either solely owned by the founder or owned by the founder and her family. Were such an S corporation to buy residential property, it is unlikely that the shareholders -- the founder and her family -- would object, or that doing so would subject them to a suit by others, since there are no other shareholders.
Small businesses often form S corporations rather than C corporations even when the founder intends to issue shares to investors. S Corporations have fewer obligations to report activities to government, simpler accounting and no federal or state income taxes at the corporate level. When S corporations have stock-holding investors, the articles of incorporation may allocate control among them. The investors may not approve a residential purchase if it only benefits one or more corporate officers or board members. Even when shareholder approval is not required, corporate officers and boards become vulnerable to shareholder lawsuits if they use corporate money to benefit themselves.
S Corporations may invest in residential real estate for business purposes. This activity may be in addition to others, or it may be the primary purpose of the corporation. In either case, there are no restrictions on residential purchases by S corporations who engage in real estate activities, as long as shareholders approve.
While residential real estate purchases by S corporations is legal, it is more complicated than purchases made by an individual. Sellers usually require a certified copy of a resolution by the board of directors approving each transaction. Sellers may also want to review the articles of incorporation and they may require written approvals from shareholders. Financing a real estate purchase by an S corporation is especially difficult. Because an S Corporation has limited liability, lenders require personal guarantees by one or more corporate officers, who must assume full responsibility for timely repayment. Real estate professionals often recommend an LLC -- another type of limited liability company that enjoys unique tax advantages -- over S corporations for real estate purchases.