Should the operating company and real estate be held in separate entities?

October 29, 2019

By:  Paul D. Creme

Many small businesses may at some point face this question. As your business grows, it may make sense to purchase a building in which to operate the business. The reasons may include; tax breaks, liability protection, control over the rental expense, and certainty as to location going forward.

If you decide to build or purchase a building you can make the decision as to the entity that will be the owner. For purposes of this discussion we are assuming that you will want to shield yourself from personal liability for owning and financing the property so an entity, either the one you currently have in place for your business for the formation or a new entity is an easy and almost automatic decision.

Holding the property in the current entity

This is a choice that may make sense for ease of operation and expense. This is especially relevant if this location is the only business location and you have no intention of expanding the business to any other locations.

You may, in conjunction with your accountant, decide that there are no significant tax benefits for holding the operating business and real estate in separate entities and filing one return makes sense.

You may be comfortable with this position if there is a clear lack of any environmental concerns and the risks associated with operating the business itself are covered by insurance or contract language.

It also may make sense if you are the only person holding the equity in the operating company and will also be the sole owner of the real estate.

Forming a new entity to hold the real estate

For the following reasons it may make sense to form a new entity to hold the real estate; tax reasons, multiple locations, multiple equity holders in the operating company, liability concerns, etc.

The tax considerations should be carefully reviewed with a professional and this will also determine the type of entity, either a limited liability company or a corporation. If you have multiple locations you may wish to keep the liability separate, especially if located in more than one state.  You may want to hold the real estate as a separate asset from the business if there are other equity holders in the business and you have reasons to not make them members or shareholders in the real estate.

One last reason is you may wish to hold onto the real estate if you sell the operating company. This will allow you to continue to receive revenue after a sale. Also, you may wish to treat the sale of the real estate differently if the buyer wants to buy it as well.

The decision is one that requires careful consideration and advice from professionals. Factors such as the commercial rental market and your long terms plans are also factors.

If you have questions regarding forming a business entity, creating or amending bylaws, a shareholder agreement, or compensation plan, please contact our Business and Private Clients Practice Group at 603-223-2800 or Paul Creme at pcreme@sulloway.com.