18A — August 28 - September 10, 2015 — Commercial Real Estate Law — M id A tlantic
Real Estate Journal
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C ommercial R eal E state L aw
By Matthew A. Cosenza, Kaplin|Stewart A “new” form of entity for Pennsylvania real estate transactions?
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n Pennsylvania, the lim- ited liability company has been in existence for over
bers from personal liability, and can receive the same tax treatment as a partnership or Subchapter S corporation. Most owners of real estate in other states use the limited liability company as the pri- mary entity for owning real estate. Notwithstanding all of these benefits, most people’s first choice to own real estate in Pennsylvania is still the limit- ed partnership. The main rea- son for this is that in Pennsyl- vania, a limited partnership is exempt from the Pennsylvania Capital Stock Tax, and a lim-
ited liability company is not. The Capital Stock Tax is a tax assessed on “corporations.” The term “corporations” is broadly defined to include cer- tain other entities, including limited liability companies. Limited partnerships are ex- cluded from the definition of “corporations” and are there- fore not subject to the tax. Generally speaking, the Capi- tal Stock Tax is a tax imposed on the capital stock value, or net wealth of a company, as derived by the application of a formula. The Capital Stock Tax is computed by multiply-
ing the “capital stock value” of the entity times the “capital stock tax rate.” The “capital stock value” is determined according to the following statutory formula: the product of 1/2 the sum of (1) the five year average net income capitalized at the rate of 9.5% plus (2) 75% of net worth, from which product shall be subtracted $160,000. The “capital stock rate” is currently 0.45 mills (00045). Through this formula, a lim- ited liability company doing business solely in Pennsylva- nia that has $1 million of book
net income and $10 million of book net worth would owe capital stock franchise tax of approximately $4,000. While this is not a significant tax (the millage has decreased signifi- cantly since the introduction of the Capital Stock Tax), real estate owners still need to discuss this tax with their tax professional prior to making a decision on the choice of an entity to own real estate. The most common alter- native to a limited liability company has been a limited partnership. With a limited partnership, each limited partner is also shielded from personal liability for the debts of the limited partnership. However, a limited partner- ship is required to have a general partner, which is fully liable for the debts of the lim- ited partnership. Because of this, most real estate owners form a second entity, either a corporation or a limited li- ability company, to act as the general partner of the limited partnership. This requires a second set of organizational documents and agreements. Additionally, the limited part- ners are not permitted to ex- ercise day-to-day control over the limited partnership at the risk of being characterized as general partners and therefore subject to personal liability. There is much less flexibility with a limited partnership as opposed to a limited liability company. If not for the Capital Stock Tax, most would prefer one-tier limited liability com- pany structure over the two- tier limited partnership. The Capital Stock Tax has been scheduled to be phased out many times in the past, but due to budget concerns, has survived. Currently, the Capital Stock Tax is scheduled to expire at the end of 2015, and it appears that this may actually occur. If the Capital Stock Tax actually expires, 4045655v1 limited liability companies may become the primary Pennsylvania method for owning real estate, provid- ing real estate owners with a “new,” and more flexible form of entity. Matthew A. Cosenza is a principal of the firm and a member of the Real Estate Transactions Department. Cosenza concentrates his practice in the areas of real estate and business transactions. n
20 years. A limited liabil- ity company is simple and relatively in- expensive to f o rm, doe s not require the demand- ing procedur- al upkeep of a
Matthew Cosenza
corporation, is very flexible in allowing its members to struc- ture it to meet their specific needs, shields all of its mem-
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