When investing in a property, giving careful consideration on ownership structure could prove to be crucial. Buying directly the property, or setting up a corporation to buy the property, may have its own advantages and disadvantages. Needless to say, one has to weigh on its upsides and downsides before deciding to buy, because investing in properties could cost quite a buck. Thus, it is best to have an informed choice before making such purchase.
Advantages of ownership through a corporation
Limited Liability. Corporations are considered as persons, and with personality separate and distinct from that of the directors, officers, and stockholders. Unless there are fraudulent transactions involved, there would be no basis under the law to pierce the veil of corporate fiction. This separate corporate personality therefore shields personally-owned assets from any liability which may otherwise be incurred only by the corporation who owns the property.
Easy transfer by subscription of shares. Since the corporation owns the property, one would have to acquire shares of stocks in order to acquire interest over said property. This would be much easier because anyone who wish to acquire interest over the property would not have to deal anymore with the cumbersome process of property registration before the Registry of Deeds. Stock transfer is enough, and all it needs is for such stock transfer to be recorded in the books of the corporation.
Taxes only on declared dividends. Subject to the provisions on the Tax Code on Improperly Accumulated Earnings Tax (IAET), income taxes are due only on such dividends actually declared. A shareholder can use this to determine his individual income in a particular year, considering that the corporation may or may not declare dividends depending on the discretion of the Board of Directors, and taxes shall be due only if dividends are declared.
Control by the Board of Directors. Despite the fact that various persons may have indirectly acquired an interest over the property by subscription to shares of stock, one may still retain the power to manage the property owned by the corporation by being a member of the Board of Directors, as all corporate powers are exercised by the Board under Section 23 of the Corporation Code.
Disadvantages of ownership through a corporation
Higher income tax rate for a corporation. A corporation is subject to only a single rate of corporate income tax, which is currently at 30% of the gross income. The rule is different for individuals, as they are subject to income tax in graduated rates, which means that the shareholders, as individuals, shall pay taxes at a lower rate if the corporate property makes lower profits. Just take note, however, that this particular disadvantage may turn into an advantage when the corporate income already exceeds P2,000,000.00 per annum, because individuals could now be subjected to higher tax rates than corporation when such income threshold is exceeded. Under the TRAIN Law (R.A. No. 10963), individuals can now be taxed at 32% to 35% on net income when the said threshold is exceeded, as opposed to only 30% flat rate on net income for corporations.
Applicability of the Minimum Corporate Income Tax. After the fourth year, the corporation shall already be subject to Minimum Corporate Income Tax (MCIT) at 2% of the gross income under Section 27(e) of the Tax Code, whether or not the corporation has actual earnings. This is not the case for individual owners, whose income will be taxed strictly based on its net income.
Higher tax rates on transfer of shares. Since it is the corporation who owns the property, anyone who would wish to acquire an interest on said property may do so by subscribing to shares of stock in the corporation. Under the TRAIN Law, however, capital gains on transfer of shares is now taxed at a fixed rate of 15%, as opposed to capital gains tax of only 6% flat rate that individuals incur in transferring ownership over the property itself.
Double taxation. If the corporation makes a profit, the government will take a big chunk of such profits through corporate income taxation. Once the dividends are taken out of the corporation, then the shareholder will ultimately have to pay for his own income tax. In such case, the corporation’s earnings shall be taxed twice.
Additional costs. Forming a corporation will necessarily entail additional cost for processing and payment of fees.
Weighing in on the pros and cons
In sum, forming a corporation for the purpose of buying properties has its own pros and cons. However, depending upon the circumstances, one may take full advantage of the pros and minimize the cons. It must be noted that the cons mentioned above focus more on possible tax treatment and additional cost. Therefore, the following should be taken into consideration.
If the property to be purchased is not expected to earn profits, it would be more advisable to form a corporation that would purchase and own the property. Since no profits are expected, there would be no reason to worry about being assessed of huge amounts of taxes despite having a fixed rate of 30% corporate income tax, or being subjected to 2% MCIT whenever applicable. There would also be no expectation of dividend declaration that may subject an individual shareholder to income tax.
Forming a corporation would even provide a shield that would prevent the stockholders’ individual properties from being subjected to liability, provided that there are no fraudulent transactions and/or bad faith in dealing with third persons. This is an advantage individual property owners will never have.
More importantly, the owner of the property will be able to avoid being taxed twice on the very same earnings that the property has produced, which taxes would have amounted in huge values given the fact of earning profits, and the huge applicable rates that such earnings may be subjected to. Twice.
Given the advantages and disadvantages of owning a property through a corporation, one has to give serious thoughts as to the ownership structure. It is so because the simple difference in its ownership can spell the difference between saving big, or paying additional costs.
Source: Alburolaw