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Q: I am looking to purchase a building in which to operate my business. Should I use a separate entity to own the building?
A: In most situations, yes. Owning the building in the same entity that operates your business can be convenient; however, there are several reasons why a separate entity is generally preferable.
Many businesses are taxed as C corporations, making it tax inefficient to own assets such as real estate that can appreciate significantly over time. When a company’s real estate is sold, any gain is subject to double taxation. First, the business must pay applicable corporation tax, and second, the owners must pay another tax on the distribution of net proceeds. In contrast, owning the real estate in a separate entity allows you to use a pass-through entity, such as a limited liability company (“LLC”) taxed as a disregarded entity (if there is a single owner) or a partnership (if there are several owners). The LLC leases the property to the business and when the property is sold, it is taxed only once.
Even if your business is an LLC, consider separating operating assets from real estate for asset protection. For example, if someone trips in the building, company assets can be better protected in the event of a lawsuit. Conversely, if the company files for bankruptcy, the real estate is protected from creditors, unless it is pledged as security for a commercial debt. (The legal separation of entities does not eliminate the need for adequate liability insurance for both entities.)
Owning real estate through a separate entity also gives you more options for growing your business and planning for succession. For example, you can offer equity interests in the business to investors or offer employee profit-sharing plans without diluting your ownership of the real estate. You can also customize your estate planning strategy, such as passing the business on to family members who take over operations or selling it to a third party, and owning the property so you continue to receive the income stream. rentals until you retire. Additionally, you can choose to donate the business and real estate to separate beneficiaries.
Although holding real estate separately offers many advantages, you should consult with your accounting, wealth management and legal advisors to determine the best approach for your particular situation.
Posted: Union Leader, July 10, 2022
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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