Why You Should Have Agreements for Joint Ownerships: Part 3
Form a company to hold the property
Another way to reduce risk in a joint ownership is to set up a joint-holding company to hold the property. This could potentially eliminate some hurdles at the point of exit from the investment.
Unlike jointly holding a property, the majority rules in decision-making in a company as regulated under the Companies Act, potentially easing the decision-making process.
Apart from that, there is a difference between being a director and a shareholder especially in terms of rights and obligations.
According to Normaliza, the benefit of forming a company to hold a property is that the rights of each co-proprietor will be based on the amount of company shares they hold. Similarly, the liability is limited to the shares held.
A company can also act as an entity for ownership transfer. As a shareholder, one can sell shares in the company that owns the property. A shareholders’ agreement can be drawn up to govern the co-owners’ relationship.
On top of that, she points out that a company that owns a property can have an increase in their limit for capital funding.
However, costs and ongoing obligations for setting up a company should also be mulled over.
Costs to maintain a company include employing a company secretary to keep records and proceedings, as well as the expenses for annual filings, book keeping, mandatory annual audit, tax submission and Annual General Meeting and/or Extraordinary General Meeting and so on. Costs of setting up a company and closing it down should also be considered.
The good part is that all expenses are deductible as company expenses instead of individual expenses.
On the downside, if a company is to acquire a residential property, the margin of finance from the banks is generally lower given that the purchase is for investment purpose, while the applicable interests might differ too.
He adds that the profit from the property disposal and rental could be subject to Real Property Gains Tax or income tax depending on the circumstances. Furthermore, there is also a need to declare dividends before the profit can be distributed to the shareholders.
Whatever you choose to do, it is best to consult a professional, Tan advises.