Purchasing the property where your company operates can be an exciting milestone. Instead of paying rent to another property owner, your company may have an opportunity to build equity, gain more control over its physical space, and establish a long-term location. However, deciding to purchase property raises another important question: who should actually own it?
Business real estate can be owned in several ways. The business owner might purchase the property personally, a separate limited liability company (LLC) could hold the property, or the operating business itself could become the owner. Each arrangement comes with different considerations involving liability, financing, taxes, succession planning, and a potential future sale.
There is no ownership structure that works for every company. Understanding the differences can help business owners make a decision that supports both the property purchase today and their goals for the future.
Why the Ownership Structure Matters
When purchasing a commercial property, it is natural to focus on the building itself. Location, price, condition, financing, available space, and opportunities for expansion may all be at the top of the list.
The ownership structure deserves attention too.
A business real estate purchase may represent one of the largest investments an owner makes. Over time, the property could appreciate, generate rental income, become part of a business sale, or eventually be transferred to family members.
How the property is owned can influence what happens in each of those situations.
Taking time to consider ownership before completing a purchase can provide greater flexibility and help align the property with the owner’s broader business, financial, and estate planning objectives.
Option 1: Owning the Property Personally
One option is for the individual business owner to purchase the property personally. The operating company then uses the building, often under a lease with the owner.
This approach keeps ownership of the property separate from ownership by the operating company. That distinction can become especially important if the owner eventually decides to sell the business.
For example, the owner may want to sell the company but retain the building as an investment. The new business owner could potentially continue leasing the property, allowing the original owner to maintain a source of rental income.
However, personal ownership also creates legal, liability, tax, financing, and estate planning considerations. Commercial property can be a valuable asset, and owners should consider how personally holding that property fits into their broader plans.
Business real estate decisions should therefore look beyond what seems easiest at the time of purchase.
Option 2: Using a Separate LLC
Another option is to create a separate LLC specifically to own the property.
Under this arrangement, the operating company conducts the business while another entity owns the building. The property-owning LLC may then lease the space to the operating company.
This creates a formal separation between the company’s operations and its real property.
For example, imagine a manufacturing company purchases a warehouse. Rather than placing the warehouse directly into the manufacturing company’s name, the owners create a separate LLC that purchases the property. The manufacturing company then becomes the tenant.
Keeping business real estate in a separate entity may provide additional flexibility when planning for the company’s future. The business and property can potentially follow different paths if the owner eventually retires, sells the company, or transfers assets to family members.
Why Owners May Separate the Property From the Business
An operating business encounters risks through its everyday activities. Employees, customers, contracts, products, services, and other operations can create potential liabilities.
Real estate is a separate and often valuable asset.
Some owners therefore prefer to keep the property legally distinct from the company conducting daily operations. A separate LLC can help establish that distinction, although simply creating an LLC does not automatically eliminate every risk.
Entities must be properly established and maintained. Appropriate agreements, recordkeeping, insurance, and other legal and business practices remain important.
Separating business real estate from company operations can also make the financial relationship between the two easier to identify. The operating company may pay rent to the property-owning LLC while expenses associated with the building are handled separately.
Option 3: Letting the Operating Business Own the Property
A third option is allowing the operating company to own the property directly.
This may appear to be the simplest arrangement. The same company owns the business assets and the building where the business operates. There is no need to create a separate property-holding entity or establish a landlord-tenant relationship between related companies.
For some businesses, that simplicity may be appealing.
However, owners should consider what happens when a valuable property is held inside the same entity responsible for daily operations.
If the company eventually faces a business-related claim, the property is an asset of that company. Direct ownership can also affect future transactions if the owner wants to sell the business but retain the property.
Before placing business real estate directly into the operating company’s name, it is helpful to think about where both the company and property may be headed over the long term.
Consider What Happens If You Sell the Business
Many business owners do not expect to sell their company when they first purchase property. But businesses evolve.
An owner may eventually retire, transfer the company to family members, sell to employees, merge with another organization, or receive an attractive purchase offer.
Real estate can become an important part of those negotiations.
If the operating company owns the property, a potential business sale may involve both assets. If the property is owned separately, the owner may have additional choices regarding whether to sell or retain the building.
Some owners may prefer to keep the property and lease it to the buyer of the business. Others may want the property and company sold together.
Structuring business real estate with the owner’s eventual exit strategy in mind can help preserve those options.
Think About Business Succession
Property ownership can also play an important role in business succession planning.
Consider a family business owner with multiple children. One child may be actively involved in the company while another has chosen a completely different career.
The owner might eventually want the child involved in the company to take over operations while distributing other assets differently among family members.
If the operating business owns a valuable commercial building, separating those interests may become more complicated.
Alternatively, an owner may intentionally want the property and company to remain together.
There is no single correct approach. What matters is understanding how today’s ownership decisions may affect tomorrow’s succession plan.
Financing May Affect Your Options
The ideal ownership structure on paper must also work with the realities of commercial financing.
Lenders may impose specific requirements regarding borrowers, guarantees, insurance, property ownership, and other aspects of a transaction. Depending on the financing arrangement, an owner may need to personally guarantee obligations even when a separate entity owns the property.
These requirements should be understood before closing.
Business real estate purchases often involve several professionals, including attorneys, lenders, accountants, insurance professionals, and financial advisors. Coordinating these perspectives can help owners avoid selecting a structure based on one consideration while overlooking another.
Tax Considerations Should Be Part of the Conversation
Commercial property ownership can have significant tax implications.
Rental income, depreciation, improvements, operating expenses, property transfers, and an eventual sale may all have tax consequences. The structure used to own the property can influence how certain income and expenses are handled.
Tax circumstances differ substantially among businesses and individuals, so business owners should work with qualified tax professionals when evaluating these issues.
Legal and tax planning should complement one another.
The goal is not simply to identify the structure with the most immediate advantage. It is to establish an arrangement that makes sense for the owner’s complete financial picture and long-term objectives.
What If Your Company Has Multiple Owners?
Commercial property decisions can become more complex when several people own the operating business.
Suppose three individuals own a company equally. Do all three want to invest in the building? Should each person also own one-third of the property? What happens if one owner eventually leaves the company?
Those questions can become especially important if business real estate is held through a separate LLC.
The ownership percentages of the property-holding company do not necessarily have to mirror the operating business, depending on how the arrangement is structured. However, differences should be carefully documented and understood by everyone involved.
Agreements may need to address management authority, expenses, transfers, buyouts, and what happens when an owner dies, retires, or wants to sell an interest.
Addressing these questions at the beginning can create much greater clarity later.
A Lease Can Be Important Even When You Control Both Entities
When the property is owned personally or through a separate LLC, the operating company may technically become a tenant.
That relationship should generally be treated seriously.
A written lease can establish the rent amount, payment terms, maintenance responsibilities, insurance requirements, improvements, renewal provisions, and other expectations.
It may seem unnecessary when the same individual controls both the landlord and the tenant, but proper documentation helps establish a clear relationship between the entities.
Maintaining that separation can also make financial records easier to understand and help demonstrate that each organization is being operated independently.
Commercial Property Can Become a Retirement Asset
The building where you operate today could play a very different role later in life.
A business owner might spend decades building a successful company and accumulating equity in the property. At retirement, the company could be sold while the owner retains the building.
If the buyer continues operating from the same location, the former business owner may potentially become the landlord.
In other circumstances, the property could be leased to a completely different tenant or sold independently.
Thinking about business real estate as both an operational resource and a long-term asset can change how an owner approaches the original purchase.
If retirement income or long-term property appreciation is part of the plan, ownership structure becomes an especially important consideration.
How Does the Property Fit Into Your Estate Plan?
Commercial property can also become an important estate planning asset.
If you die or become incapacitated, what should happen to the building? Should it pass to the same person who receives the company? Would multiple beneficiaries share ownership? Is there a plan for managing the property if the business continues operating?
These questions become particularly important for family-owned companies.
An estate plan should coordinate with business agreements and property ownership so that the documents do not unintentionally work against one another.
For example, a succession plan that transfers the operating company to one person may need to account for who owns the building and whether the company will continue having the right to use it.
Don’t Base the Decision on Liability Alone
Liability protection is an important consideration, but it should not be the only reason for selecting an ownership structure.
A business owner should also consider flexibility, financing, taxes, succession, estate planning, future sales, and administrative responsibilities.
Creating another LLC, for example, also creates another entity that must be properly maintained. There may be separate accounting, tax, insurance, filing, and recordkeeping requirements.
The benefits of a particular structure should be considered alongside those responsibilities.
The strongest business real estate strategy is one that reflects the owner’s complete circumstances rather than focusing on a single advantage.
Questions to Ask Before Buying
Before deciding how your company should hold commercial property, consider several long-term questions:
- Would you want to keep the property if you eventually sell the business?
- Could the building become a source of retirement income?
- Do all of the company’s owners want an interest in the property?
- Should the company and property eventually pass to the same beneficiaries?
- What financing requirements will apply?
- How will the property fit into your estate and succession plans?
- Are you prepared to maintain a separate entity if you create one?
You do not need to know exactly what will happen decades from now. Thinking through possible scenarios can still help you select a structure that leaves room for future changes.
Plan Before You Purchase
Buying commercial property can give a company greater stability, control, and opportunities for long-term growth. The building may also become a valuable investment separate from the company operating inside it.
That is why ownership deserves careful consideration before the transaction is complete.
Business real estate may be owned personally, through a separate LLC, or by the operating company itself. Each approach has potential benefits and considerations, and the appropriate choice depends on the owner’s specific circumstances.
Rather than viewing ownership as a technical detail to address at closing, business owners can incorporate it into broader discussions about liability, financing, taxes, retirement, succession, and estate planning.
Build a Structure That Supports Your Long-Term Goals
A company’s needs today may look very different from its needs 10 or 20 years from now. The same is true of the owner.
You may eventually sell the company but keep the building. You may transfer both to the next generation. You might sell the property independently, bring in new business partners, or use the building as an income-producing asset during retirement.
Planning cannot predict every future development, but it can create flexibility.
Thoughtfully structuring business real estate from the beginning can help ensure that a valuable property supports both the company’s current operations and the owner’s broader plans for the future.
Contact Antanavage Farbiarz
If you are considering purchasing commercial property or want to review how an existing property is owned, Antanavage Farbiarz can help you evaluate the legal considerations and how they fit into your broader business planning.
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