Keep Your Business Real Estate in a Separate Company

Minnesota small business owners who hold their operating business assets and real estate assets in separate companies may realize tax, business, legal and estate planning advantages.

Save Taxes. The Real Estate Company can charge the Business Operating Company rent, which will lower the income tax liability of the Business Operating Company. Meanwhile, the rent received by the Real Estate Company can be used to pay off the mortgage on the property held by the Real Estate Company.

Limit Risk. If one of the companies ever faces a creditor, liability or judgment issue, risk exposure will likely be limited to just the assets of that company rather than both.

Business Option. The ownership and structure of the Real Estate Company and the Business Operating Company could be the same, or could differ somewhat. For a family operation, some family members might own one and others own the other company.

Exit Option. The owner can sell the Business Operating Company when he or she is ready to retire or exit the business, but keep the Real Estate Company. That way, the owner will have an ongoing income stream from the rental of the real estate to the Business Operating Company, and can capture any appreciation in the value of the real estate. After the mortgage for the real estate is paid off, the rental income may provide important income to the owner.

Estate Planning and Business Succession Advantages.  Perhaps the owner has one or more children who wish to succeed to the ownership of the family business, and others who don’t. The two-company strategy allows a small business owner to transfer the Business Operating Company to certain children, while transferring the Real Estate Company to those who don’t want to be involved in day-to-day business operations. The children owning the Business Operating Company will have the opportunity to build wealth from their ownership of it. The children who own the Real Estate Company will receive rental income.

To accomplish the two-company strategy, separate business entities will need to be officially formed and registered with the Minnesota Secretary of State. Separate minutes of board and shareholder meetings will need to be kept. The two businesses will need separate checking accounts, accounting and tax records. Dealings between the two entities will need to be formally documented. For example, a commercial lease will need to be drafted that outlines the lease terms between the Business Operating Company and the Real Estate Company.

Owners should seek the advice of an attorney and accountant to explore the best alternatives and set-up to accomplish the individual owner’s desires and goals.

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Disclaimer: This Blog is for informational purposes only and is not to be construed as legal advice. If you have questions, please seek the advice of an attorney. An attorney-client relationship is not formed by reading this Blog. If you are interested in Wittenburg Law’s representation of you, you must contact Wittenburg Law for a determination of whether your matter is one for which Wittenburg Law is willing and able to accept representation of you.

Bonnie Wittenburg, Wittenburg Law Office, PLLC, 601 Carlson Parkway, Suite 1050, Minnetonka, MN 55305    952-649-9771   www.bwittenburglaw.com   bonnie@bwittenburglaw.com