Succession Planning: Separate Your Business from the Real Estate

illustration of a blue pie chart with a red slice cut away | Succession Planning: Separate Your Business from the Real Estate | Dalby Wendland & Co. | CPAs | Business Advisors | Grand Junction CO | Glenwood Springs CO | Montrose CO

Most businesses have a variety of physical assets, including production equipment, office furnishings, and a number of technological devices. Typically, however, your largest physical asset in the business is your real estate holdings, i.e., your building and the land it sits on. So, why should you separate your business from the real estate?

Oftentimes, business owners purposely choose to separate ownership of the real estate from the company itself. One of the reasons for this strategy is to help protect these assets from claims by creditors if the business ever files for bankruptcy (assuming the property isn’t guaranteed as loan collateral). Another reason is the property is better shielded against injury claims that may arise if a customer is injured on the property and sues the business. In some instances, you may also capture tax savings.

We have one more reason to consider this arrangement – to aid your succession plan. Here’s why.

Transition of Ownership

Typically, to separate the ownership of real estate from the company, you would set up a specific entity (such as a limited liability partnership, LLP; or limited liability company, LLC )to hold legal title to the property. Your business then rents the property from the entity in a tenant-landlord relationship.

This strategy can help you transition ownership of your company to one or more successors, and you can sell shares in the company to the successors or employees without transferring ownership of the real estate.

Another advantage by retaining title to the property is you can collect rent from the new owners, which can be a valuable source of cash flow during your retirement.

There are also estate planning benefits you can realize. 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.

Don’t Do it Alone

There are a lot of complex details involved in separating your real estate from your business. You should talk with your tax advisor to determine if this strategy would be beneficial for your company, succession plan, tax situation, etc. We can help you look at all considerations and make the best decision for your situation.

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