Small Business Owners and Commercial Real Estate: Buying Your First Building
Wednesday, March 16, 2016
Whether you are interested in purchasing commercial real estate to (ultimately) lessen the financial burden on your small business or simply as an investment, there are a few important choices you need to make at the beginning of your new venture.
Should you own the property inside or outside of the business?
If your business entity owns the property it will be at risk for business debts and liabilities, and if your business is an S-Corporation, you’ll have to give up tax advantages under the “at risk” rules. Assuming you will need a mortgage to purchase the property means that it will weigh more heavily on your balance sheet as a liability than an asset, at least for the first few years, anyway.
You may be better served holding the property outside of your business entity. But then, who should own the building?
A smart move is to create a separate limited liability company to own the property. This shields the property from business and personal debts and liabilities. You, your spouse, and business partners can decide who owns the LLC. Be sure that it’s taxed as a partnership rather than an S-Corp.
Your business will still benefit from the new arrangement. “Rent” your building to your business, and if it’s large enough, to other renters as well. You’ll be able to pass building expenses on to your tenants (even if you’re the only tenant, you can offset the expenses with income from your company).
Be very careful with your commercial lease, even if you’re the only tenant. It’s easy to find lease templates for free on the Internet but they can get you into real legal trouble. It’s much more prudent to have an attorney draft a commercial lease for you. They will ensure that there’s enough distance between the two companies to satisfy the tax code as well as guide you through important language that can protect both entities.
You’ll also want to consult your CPA and an insurance agent with experience with commercial leases.
If you’re planning to purchase commercial property to house your small business, give our office a call to set up an initial consultation.