Potential Legal Structures

The recommendations below are based on Diane Christian's book Creating a Life Together. Eventually we'll hire a lawyer, but in the mean time we need to be informed and think about options.

Recommendations:

1)     establish an LLC

or

2)     a.  first create a non-exempt non-profit corporation to show prospective members that it is a serious project  (see p. 184 Creating A Life Together)

b.  then dissolve that and establish an LLC before purchasing land

   LLC
 

     LLC PRO

  • Limited liability

  • Pass thru tax benefits

  • Fewer requirements than Sub Chapter S Corps (no limitation on number of owners)

  • Easier paperwork than regular corporations

  • When the LLC owns the land, then membership can be controlled (unlike homeowner or condo association, where Federal Fair Housing Act protects buyers from discrimination)

  • The LLC can retain ownership of the land when a member leaves.

  • Allows for stated differences between contribution and responsibilities and rights  (i.e., one person can own 1000 shares, another 50 shares, and a third, 1 share, and yet the taxes are split evenly between the three)

  • Allows for different decision making rights for different types of members-the only ones we have in mind so far is the decision whether to keep or dissolve the community, and possibly making the first planners be the founding members.

  • Offers tax writeoffs for large investors

 

LLC CON

  • More costly to establish than a partnership

  • Requires paying state filing fees (similar to other corporations)

  • Pass thru taxation is only beneficial to individual members if they’re in a 15% tax bracket or lower

  • Any savings the LLC accumulates is “profit” and tax liability for these funds must be pass though to each member at the end of the year (although the funds do not actually leave the LLC’s bank account
     

Homeowners Association – leased homesites

But we can have just symbolic leases ($1/year per room)

 HA PRO

  • Since the homesites are leased and not owned, members are unable to use the homesites as collateral for bank loans

  • Members can be chosen (not when homesites are owned instead of leased)

  • Being a homeowner’s association could help in the zoning process

  • If the rules are met, then income is tax exempt

  • If the rules are not met, but homeowner’s association can break even, then no taxes are owed anyway

  • The community could establish subsidiary corporations or non-profits to handle those activities (like child care or food co-ops, or educational donations, etc) that are causing difficulties in meeting the tax exempt rules

  • The community could start as a homeowner’s association during the building phase, delaying activities that would cause the association not to meet the tax exempt rules, and then switch to another property owning entity (like an LLC) after the building phase is complete and the activities are ready to begin

   HA CON

  • Initial financing member’s equity protection unclear in this scenario

  • Not very much flexibility regarding decision making – usually one vote per house, but this might be modified depending on which state you’re in

  • Tax rules may be hard for community to meet tax exempt status

  • If taxed, the flat rate is a whooping 30% on the income that does not meet the tax exempt rules

  • If the income not meeting the tax exempt rules > 40% of all income, then the homeowner’s association must pay taxes on all income like a regular corporation

  • If the expenses not meeting the tax exempt rules > 10% of all expenses, then the homeowner’s association must pay taxes on all income like a regular corporation

  • If the rules are not met, no taxes are owed if the homeowner’s association can break even, but breaking even can be a hard thing to do (1. if large capital expenditure that year, must depreciate over several years and can’t take a full write-off in the current year, 2. wanted to save money for future expenditure – either building or maintenance)

  • If the community establishes other subsidiary corporation or non-profits in order for the homeowner’s association to meet the tax exempt guidelines, 1. now there is a lot more paperwork to track for the subsidiaries, 2. there’s no specific IRS guidance, which requires competent tax and legal advice

  • If the community starts as a homeowner’s association and then switches to another type of ownership 1. paperwork, 2. need careful legal and tax advice

But all the above "ifs" may not be true. In which case a HA may be better than an LLC.

Non-exempt Non-profit Corporations

NENPC PRO

  • Limited liability

  • Relatively straightforward and simple corporate taxation

  • Taxes are handled on the community level

  • Members don’t have to wait for the corporate taxes are done before they do their own individual taxes

  • No pass through amounts to be figured

  • If the community had a financial crisis, that wouldn’t necessarily translate in the crisis being passed through to the members

  • Tax rate is 15% on first $50k in income, so this is unlike pass through taxes, where someone in a lower tax bracket will pay 15% and someone in a higher tax bracket could pay 30%, which is twice the corporate rate

  • Taxes are not owed on monies saved for future expenditures because it’s stockholder contribution to equity with after tax dollars

NENPC CON

  • Tax is owed on other types of income that the community may generate – like a newsletter or visitor fees

We might also think about community land trusts, especially if someone can donate the land.

 

Legal Documents:

Here are some examples which we could modify to suit our needs:

http://www.bhfarm.org/by-laws.htm

http://www.twinoaks.org/community/policies/bylaws.html

Home