Types of Land Ownership
(Page 2 of 9)
November/December 1974
By Les Scher
Some states permit each shareholder to deduct from his annual personal income tax return the amount of the corporation's net loss in proportion to the number of shares of stock he owns. Thus, the shareholder receives an annual tax benefit because the corporation "loses" money. If the shareholder lives on the land, an amount equal to the appraised rental value of the land must be subtracted from the above allowed deduction unless he can show that he is living on the land to perform duties for the corporation, such as maintenance and care of the property.
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If a shareholder fails to pay his obligations as specified in the Shareholders' Agreement, the Board of Directors can vote to sell his shares to recoup the money owed to the corporation. When a buyer is found and approved, the transfer of ownership merely necessitates changing the name of the shareholder in the corporate books instead of the usual foreclosure procedure. A reserve "slush" fund is always maintained by the corporation to use if a shareholder falls behind in his payments in order to prevent a default on the mortgage payments.
If the shareholders vote to sell the entire corporate land, the profits will be divided according to the amount of stock each shareholder owns.
An advantage of a corporation is that the shareholders do not have personal liability for the acts of the corporation, and conversely the corporation does not have liability for the acts of the individual shareholders. Thus, land owned by a corporation cannot be attached for personal debts or judgments rendered against any of its shareholders. A creditor can only attach the person's shares in the corporation. He then becomes a shareholder and must abide by the rules of the corporation. In this way, the other landowners are protected from having their ownership disrupted by an unwelcome stranger. If the Board of Directors must approve the sale of any stock, the creditor might find it difficult to collect his money.
On the other hand, if the corporation cannot pay its debts, none of the shareholders can individually be forced to pay a creditor, although the corporation's assets, such as its land, can be reached and sold to make up a debt. If the land is worth less than the amount of debts, the creditors cannot get a deficiency judgment against the shareholders.
The major disadvantage of a corporation is the cost involved in incorporating, since you will probably need an attorney to draw up the documents and you will have to pay state filing fees and state corporation taxes. But the corporate form of ownership has many advantages for a group that wants to own a large undivided parcel of land.
COOPERATIVE CORPORATION
If your group plans to buy land primarily for the purpose of living on it rather than for the purpose of investment, you might see whether your state recognizes a specific corporation called the "cooperative corporation." Under a cooperative corporation the corporate organization is seen as a "landlord" and the individual shareholding members are viewed as "tenants." Because this arrangement is more a type of property ownership rather than a true corporation, some states have placed the cooperative corporation under the supervision of the Real Estate Commissioner rather than the Secretary of State, who normally oversees corporations. Instead of issuing shares of stock, the cooperative corporation issues a "certificate" entitling the holders to a vote in the corporation's management and the right to live on the land. Everything else in this type of corporation is arranged in basically the same way as the profit-type corporation. Each state has its own laws on cooperatives, particularly with regard to their tax status.
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