Commercial Loans Blog

Commercial Loans and Subchapter S Corporations

Posted by George Blackburne on Mon, Feb 2, 2009

Title to Many Commercial Properties are Held by Subchapter S Corporations

About 25 years ago some thief was climbing on the roof of a commercial building in New York. He was trying to break into the store to steal stuff, and he had no business being on the roof. The roof was near the end of its useful life, and the thief fell through the roof and severely injured himself.

The thief must have had unbelievable audacity because he actually sued the owner of the commercial building for negligence for failing to maintain the roof. To the shock and awe of commercial property owners everywhere, this miserable thief won his lawsuit and was awarded over a million dollars in damages.

The property owner held title to the building personally, and he was personally wiped out when the judgment debtor took virtually everything the poor man owned.

From that moment on, commercial property owners across the country desperately sought a way to insulate themselves from liability. They could not hold title as a regular "C-corp" because they would be taxed twice - once as a corporation and another time when the owners drew out their profits as dividends. Limited liability companies had not yet been invented.

The solution was the subchapter-S corporation. A subchapter-S corporation can only be used for new business ventures, and there is a limit of 35 shareholders. You can therefore never take a subchapter-S corporation public.

The big advantage of the subchapter-S corporation, however, was that it was not taxed twice. The net income of a subchapter-S corporation passes directly through to the owners of the corporation without taxation. The shareholders only pay taxes once on the profits, as they are added to their personal income on their 1040's.

As a result, for about 15 years, title to a great many commercial properties was held by a subchapter-S corporation.

Modernly, subchapter-S corporations have been replaced by limited liability companies (LLC's). LLC's do not have to be new ventures, and ownership is not limited to 35 shareholders.

As a commercial mortgage broker, however, you will still occasionally see subchapter-S corporations. You will need to gather Articles of Incorporation (summary of the key organizational facts - like the name of the corporation, address, etc. - that is filed with the state), the Bylaws (detailed instructions on how to run the corporation), and a Corporate Resolution to Borrow (the minutes of the Board meeting authorizing the president to borrow money on behalf of the corporation).


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Topics: commercial loan, commercial real estate financing, commercial mortgage loans, subchapter-S corporations, commercial financing