Friday, August 23, 2013

Purchasing Your Place of Business: The Importance of Establishing a New Entity

At one time or another, most commercial business owners will consider purchasing the real estate in which his or her business operates.  Such a major financial commitment requires careful consideration of the economic advantages and disadvantages of owning commercial property, both short-term and long-term.

We advise our business clients to approach the real estate acquisition as a separate venture from operating the existing business.  While it is true that purchasing one’s place of business can provide stability to the business and directly benefit the bottom line of the business in many ways, it is also a long-term investment with a unique set of liabilities, benefits and risks.  Accordingly, we generally advise that the business owner establish a new legal entity to acquire the real estate and lease it to the business under commercially reasonable terms.

On the most basic level, separating the business from the real estate entity minimizes the risk that losses incurred by one entity will negatively impact the other entity.  If the business begins to operate at a loss, the owner can scale back or close the business and lease the property to another company (hopefully, at a profit).  In most cases, creditors of the business will not be able to seize the owner’s interest in the real estate entity.  Similarly, if the real estate declines in value or an accident occurs on the property resulting in significant liability to the owner, the business will not suffer as a direct result. 

There can also be tax advantages to separating the business entity from the real estate entity, most notably that the business can deduct its rental payments to the real estate entity as a business expense. We always advise our clients to consult their CPAs before establishing the real estate entity to determine the best way to experience tax savings.

If you are considering purchasing your place of business, it is important that you consult an experienced attorney to discuss how to protect your business from your new investment, and vice versa. The attorneys at Gross & Romanick, P.C. have many years of experience advising business clients on real estate matters and can assist you throughout the process.