Like most businesses, yours probably has a variety of physical assets, such as production equipment, office furnishings, and a plethora of technological devices. But the largest physical asset in your portfolio may be your real estate holdings. That is the building and the land it sits on.
Under such circumstances, many business owners choose to separate ownership of the real estate holdings from the company itself. A typical purpose of this strategy is to shield these assets from claims by creditors if there is a filing for small business bankruptcy. This is assuming the property isn’t pledged as loan collateral. In addition, the property is better protected against claims that may arise if a customer is injured on the property and sues the business.
But there’s another reason to consider separating your business interests from your real estate holdings: to benefit your succession plan.
A common and generally effective succession planning strategy is to separate the ownership of real estate from the company itself. This is done by forming a distinct entity, such as a limited liability company (LLC) or a limited liability partnership (LLP). Doing so holds all legal titles to the property. Your business will then rent the property from the entity in a tenant-landlord relationship.
Using this strategy can help you transition ownership of your company to one or more chosen successors, or to reward employees for strong performance. By holding real estate in a separate entity in the company buy sell agreement, you can sell shares in the company to the successors or employees without transferring ownership of the real estate.
In addition, retaining title to the property will allow you to collect rent from the new owners. Doing so can be a valuable source of cash flow during retirement.
You could also realize the benefits of real estate holdings. When real estate is held in a separate legal entity, you can gift business interests to your heirs without giving up interest in the property.
The details involved in separating the title to your real estate from your business can be complex. Our accounting firm can help you determine whether this strategy would suit your company and succession plan, including a close examination of the potential tax benefits or risks.