Limited Partners vs. General Partners
Real Estate Firm - A real estate firm is allowed by the State to provide real estate services/activities within the State with proper registration with the Real Estate Division. Owners do not have to be licensed to receive income from the business. However, owners must be licensed to receive real estate commission. In other words, anyone can be part owner of a real estate firm without being licensed. However, they cannot practice real estate or receive compensation from real estate activities.
Income - A limited partner or general partner is allowed to receive profit after all real estate services and commissions have been paid to the licensed sales staff. Profit is not considered commission and can be paid to non-licensed owners.
Expenses - Expenses that your real estate business experiences such as rent, commissions paid to licensees, telephone, etc., can be taken by each owner in proportion to their ownership percentage. This is applied against any profit and deducted on their personal 1040 form.
Tax Deferred Income - Since the expenses are taken, they can be applied against income from the business. Further, the limited partners can apply their invested dollars against the income and delay tax until their interest is sold.
Liability Exposure - The general partner, however, has an extreme liability exposure while the limited partners do not.
Running the Operation - Since the general partner is an active participant in running the real estate firm, the general partner is personally responsible for the debts/liens and lawsuits against the firm.
A standard corporation, known as a C Corporation, is a registered legal entity. We never say a "C Corporation;" it is simply known as a corporation. All corporations are registered within a State where it was incorporated.
S Corporation - The Sub-Chapter S Corporation has the same characteristics as a regular corporation with the corporate shield in place. Civil suits cannot be issued against the stockholders/owners personally. The main difference is the tax structure. S Corporation cannot exceed 100 shareholders.
No Corporate Tax - A Sub S corporation pays no tax. There is no corporate income tax placed on a Sub S corporation either by the IRS or the involved State.
Stockholder Income - Only the stockholders pay income tax on their share of the NET income experienced by the S corporation.
No Sheltered Income - The NET income (after deductions) of the corporation will be declared as income by each stockholder. The stockholders/shareholders cannot utilize the deductions or their investment against the profits of the corporation.
Not A Salary - Income received as a stockholder is considered to be cash dividends and not salary.
No FICA Tax - Since the income is considered a dividend and not salary, the stockholders do not have to pay FICA (Social Security) tax on the income. If a stockholder works for the S Corp. without a declared salary, the income received from the S corp. is a dividend and not salary. Therefore, the money received by the working stockholder is not subject to Federal payroll tax or State insurance fees such as unemployment tax and worker's compensation insurance.
Employee Responsibilities - The Sub S Corporation would have the regular employer responsibilities for its employees/staff, however. For those who are not stockholders, but employees, the Sub S would have to provide the standard requirements of payroll tax, withholding tax, and State employer fees for unemployment insurance and worker's compensation. For a real estate firm, the licensees working under the firm as agents of the firm are considered self-employed and not employees. The Sub S firm would not have to provide these tax services and pay State insurance for its agents.
Limited Liability Company (LLC)
The Limited Liability Company is the newest company that a firm can be formed under. It is kind of a hybrid of the limited partnership and a corporation all rolled into one. An LLC has the following characteristics:
Note : If a firm is to do business as an LLC, it is required to stipulate that it is an LLC. It "should" be on all letterhead and firm communication with the business world. This serves notice to possible creditors of the firm's status when doing business with the LLC.
No FICA Tax - Since the income is considered profit and not salary, the investors do not have to pay FICA (Social Security) tax on the income. If an investor works for the LLC without a declared salary, the income received from the LLC is income and not salary. Therefore, the money received by the working investor is not subject to Federal payroll tax or State insurance fees such as unemployment tax and worker's compensation insurance.
Employee Responsibilities - The Limited Liability Company would have the regular employer responsibilities for its employees/staff, however. For those who are not investors, but employees, the LLC would have to provide the standard requirements of payroll tax, withholding tax, and State employer fees for unemployment insurance and worker's compensation. For a real estate firm, the licensees working under the firm as brokers of the firm are considered self-employed and not employees. The LLC firm would not have to provide these tax services and State insurance for its agents.
Taxation of Real Estate
County Jurisdiction - Counties are allowed to assess property tax on both real and personal property within their jurisdiction. Each County has a tax rate per thousand that it levies against assessed property values. Assessed value is not market value or appraised value. Assessed value is determined by the County and is based on sales of property within its boundaries.
Tax Rate (Millage Rate) - The tax rate, also known as the millage rate, is determined by the County. This rate is applied against the assessed value of the taxable real and personal property.
Tax Amount - The property tax amount for given property is assessed at the County's tax rate per $1,000 of assessed value.
Increases - Though the maximum is 1% of assessed value, the voters within specific boundaries may approve additional levies up to a total maximum of 6% in any one budget year.
Which of the following is a false statement concerning the Time-share Act?
A) it deals with certain ownership and rental interests
B) the interest must extend for 3 years or be renewable for at least 3 years
C) a true time-share guarantees ownership of specific units
D) the purchaser has a 7 day right of rescission
Which one of the following dates is improper for the Washington Property Tax calendar?
A) February 1st, 1st day of the tax year, taxes become a lien
B) February 14th, taxes may be paid in full, or by half until April 30th
C) October 31st, 2nd half of taxes are due if 1st half was properly paid
D) November 30th, additional 8% late penalty assessed
Which of the following statements is false concerning the excise tax?
A) it is a percentage of the full sales price
B) if not paid within 30 days of the sale, the county charges a monthly interest penalty
C) transfers by gift, devise, inheritance, or by divorce settlement are taxable
D) excise tax is due when there is the conveyance of legal or equitable title unless tax was paid at an earlier point in the transaction
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