Considering buying a commercial real estate property, but undecided whether to do so as an individual or a corporation? This decision is far more complex than a single-line answer! Keep reading to discover a comparison of each structure.
Firstly, let’s say that you purchase commercial property, and someone is injured on the property that you own. Accidents like this are more common within commercial real estate; therefore there is generally a higher risk of liability when investing commercially.
In order to avoid the pitfalls associated with this situation, incorporation can ensure that your personal assets are safe with limited liability protection. This is an advantage of incorporation, as individuals are individually liable for any incidents that may occur.
Next, we can glance at the start-up and maintenance costs for each entity. If you choose to purchase a property with a corporation, you must pay startup costs, which include not only incorporation fees, but it is recommended to hire a professional for the process and documentation to avoid possible high-cost mistakes. Once you are set up, there are ongoing fees as well, for example, hiring a licensed professional to file your annual corporate tax returns. On the other hand, as an individual, you avoid most of these corporate fees, although it is recommended to create a separate bank account for each property.
Third, there is the aspect of taxes to consider as well. In Ontario, corporations are generally taxed at a higher rate than individuals, until your investments become active business income (non-investment income) where you may be eligible for a lower tax rate. For individuals, generally they are taxed at a marginal rate based on total income therefore less is taxed, unless your taxable income exceeds a certain amount. It is strongly recommended to consult with a tax expert regarding what business model works best for your case.
Furthermore, it is important to glance at a mortgage standpoint. While it is not necessarily harder to obtain a mortgage as a corporation, it may require more intensive documentation and detailed orientation to be successful. Additionally, commercial mortgages may bear a less attractive interest rate. Under a personal name, while the obtaining process may be easier, it is more difficult to obtain a larger total borrowing capacity than a corporation. It is important to consult with an accountant before undergoing this process.
Lastly, personal privacy benefits are more evident within corporations. This is because the transparency of ownership is lesser when you are within a corporate entity than when you invest as an individual.
We can guide you through the complex decision and legal procedures involved with creating a business entity for commercial real estate matters. This material is for informational purposes only and should not be relied upon as legal advice and is solely in accordance with the laws of Ontario.
Contact Us:
To book a consultation with Buzaker Law Firm regarding investment in commercial real estate in Ontario, contact us at: info@vblegal.ca or (905) 370-0484.