S Corporations are set up to allow income and expenses to flow through directly to a limited number of shareholders. S Corporation shareholders may be searching for ways to diversify their risk and may wonder can an S Corporation buy a home. Yes although there are other things to consider.
Understanding the S Corporation
Find Law defines an S Corporation as "A small business corporation with a limited number of shareholders. Its major significance is the fact that an S corporation usually avoids corporate income tax. Corporate losses can be claimed by the shareholders." Most S Corporations are solely owned entities where any income earned passes through to the owner. There may be more than one owner in an S Corporation and taxes are generally based only on the earnings that are taken from the corporation in the form of salary. Taxes are then paid based on the tax rate of the individual who drew the earnings.
S Corporation owners may wonder can an S Corporation buy a home? S Corporations who are established, can show the appropriate cash flow, and who have an owner (or owners) with strong personal credit may be able to buy a home if they are able to find a lender who is willing to finance.
S Corporation Loans
There are inherent risks that a lender and the owners of an S Corporation take on when financing real estate. Because the borrower is the corporation, these loans would not be eligible for FNMA loans or for FMAC loans. Most real estate that is purchased by an S Corporation would be handled under commercial loan requirements. The S Corporation would need to provide specific information to qualify for a real estate loan including (but not necessarily limited to):
Form 1003 - While the S Corporation is not a "person" the lender will most likely require the principals of the corporation to file a stand Form 1003. The information on this form would include all debts, assets and financial information regarding the corporation;
Credit reports - The lender will likely require that the S Corporation be subjected to multiple credit checks including the personal credit of any shareholders of the corporation as well as the corporation itself;
Tax returns - Lenders will require that tax returns for the corporation plus the individual owners of the corporation be included with the loan application.
When borrowers who are involved in a real estate transaction use an S Corporation to purchase a home, the individual owners of the corporation are still legally bound for the debts of the corporation. Unlike a C Corporation, there is no promise of limited liability for an S Corporation ownership. Income and debts are equally passed through to the owners of the S Corporation and all owners are responsible for the income and debt based on their individual ownership.
Loans and Insurance Consideration
When the owners of this type of entity ask, can an S Corporation buy a home--the simple answer is yes, but there are financial and legal considerations that must be taken into consideration. Generally speaking, a loan that is owned by a corporation would have a higher interest rate than a home that is purchased by one or more individuals. This is because one is considered a personal mortgage while the other may be considered a commercial loan.
Insurance also plays a factor when an S Corporation wishes to purchase a home. S Corporations can be devastated by an insurance claim that is filed due to injury on the property. For example, if a pedestrian is walking on a slippery sidewalk in front of the home, falls and sustains injury, the S Corporation could be sued. Because of the structure of the corporation, this may result in not only the corporation itself being sued, but the individual owners as well. Separate liability insurance policies may be required by lenders when an S Corporation is buying a home.
Sources and Image Credits
- IRS: http://www.irs.gov/businesses/small/article/0,,id=98263,00.html
- REI Club: http://www.reiclub.com/realestateblog/2010/10/19/the-llc-vs-the-s-corporation/
- All Business: http://www.allbusiness.com/personal-finance/investing-real-estate-investments/293210-1.html
- Business.Com: http://www.business.com/insurance/insurance-s-corporations-10021/
- Business 4 Life: http://www.business-4-life.com/business-news/understanding-s-corporation-vs-c-corporation-liability