Corporation

Key Takeaways

• A corporation is owned by shareholders who hold stock, and the law treats it as a separate artificial person that can own and convey real property in its own name.
• A shareholder is not liable to the corporation or its creditors beyond paying the consideration agreed for the shares.
• A traditional corporation's earnings can be taxed twice, once at the corporate level and again when distributed to shareholders as dividends.
• In Washington, a real estate firm may be a corporation, but the firm must hold a firm license and designate a managing broker as its designated broker.

What It Means

A corporation is a business formed under state law and owned by shareholders, each holding stock that represents a fractional interest in the enterprise. What makes the form distinctive is that the law treats the corporation as an artificial person, an entity separate from every human being connected to it. It can take Title to real property, sign a contract, borrow money, sue, and be sued, all in its own name.

Two consequences follow, and they pull in opposite directions. The first is limited liability. A shareholder's exposure is capped at the investment in the shares, so a creditor of the corporation cannot reach that shareholder's house or savings. This protection is a common reason investment property is held in an entity rather than in an individual's name.

The second is double taxation. A traditional corporation pays tax on its own earnings, and the shareholders pay again on dividends distributed out of those same earnings. The identical dollar is taxed at two levels. Several other entity forms exist largely to keep the liability shield while shedding that second layer.

Continuity is a third feature. A corporation does not end when a shareholder dies or sells out. The shares change hands and the entity carries on.

How It Works in Washington

In Washington, two separate bodies of law meet whenever a corporation touches real estate.

Formation and internal governance run under the Washington Business Corporation Act, Title 23B RCW. That is where the liability shield sits. RCW 23B.06.220 provides that a purchaser from a corporation of its own shares is not liable to the corporation or its creditors with respect to the shares, except to pay the consideration for which the shares were approved to be issued or specified in the subscription agreement.

Brokerage activity runs under a different chapter entirely. RCW 18.85.011 defines a real estate firm to include a sole proprietorship, partnership, limited liability partnership, corporation, limited liability company, or other legally recognized business entity, so a corporation may hold the firm license. It does not get to operate anonymously behind that entity. RCW 18.85.091 requires the firm to designate a managing broker as the Designated Broker with authority to act for the firm, to disclose ownership and controlling interest to the director, to confirm that no person holding a controlling interest is subject to a final order suspending or revoking a real estate license, and to avoid a firm name that duplicates an existing licensee or implies nonprofit, research, or public bureau status. The entity may be artificial, but a licensed Managing Broker still answers for what it does.

Example

Nadia, Owen, and Priya form Sound Ridge Properties, Inc. under Title 23B RCW and issue 200 shares at $1,000 each, raising $200,000. Nadia takes 100 shares, Owen 60, and Priya 40.

The corporation buys a fourplex in Everett for $890,000. It puts $178,000 down, a 20 percent down payment, finances the remaining $712,000, and keeps the leftover $22,000 in the corporate account for reserves. The Deed names Sound Ridge Properties, Inc. as grantee. No shareholder appears on it.

Two years later a tenant wins a $250,000 judgment against the corporation over an injury on an exterior stairway. Insurance pays $150,000 and leaves $100,000 unsatisfied. The judgment creditor may pursue the fourplex and the corporate accounts. It may not pursue Nadia's home in Edmonds, because her exposure ends at the $100,000 she paid for her shares. One thing the corporation still may not do on these facts is list and sell property for other people. That is brokerage, and it would require a firm license under RCW 18.85.091 with a managing broker designated to act for the firm.

Common Mistakes and Exam Traps

• The corporation owns the real estate; a shareholder owns stock in the corporation. A shareholder cannot convey corporate land by signing individually.
• Double taxation belongs to the traditional corporation. A question that attaches it to every business entity is testing whether you know which form carries two tax layers.
• A corporation does not end when a shareholder dies or sells out. Continuity of existence is a feature of the form, not an exception to it.
• In Washington, forming a corporation does not license it. A corporation acting as a real estate firm still needs a firm license and a designated broker.