If your business doesn’t own its real estate in a separate holding company, such as a limited liability company (LLC) or limited partnership, you may want to think twice. The practice of separating your business and its real estate can provide several advantages, including shielding property from company creditors, easing estate planning burdens and offering tax benefits. Let’s take a look at all three. 

Asset Protection 

Owning real estate in a separate legal entity can wall off an operating business from its real estate’s potential liabilities (and vice versa). A creditor who targets your business generally can’t reach real estate held in a separate entity. And if, for example, someone slips and falls in your office, factory or warehouse and sues, holding the property in a separate entity may help protect your operating business’s other assets.  

Such protection extends to bankruptcy. If your business is forced to file for bankruptcy, creditors typically can’t recover separately owned real estate. However, there’s at least one exception: Real estate you’ve pledged as collateral for a business loan may still be subject to claims by lenders. 

Estate Planning Advantages 

Owners of real estate in LLCs or limited partnerships also enjoy estate planning and succession flexibility.  

This flexibility can be especially valuable when planning how to distribute assets among heirs. As an example, if you have two grown children, but only one is actively involved in the business, you could equitably divide assets by transferring the business to the actively involved child and the real estate to the other.  

In addition, gradually gifting interests in a separate entity holding real estate can reduce the value of your taxable estate. 

Tax Matters 

C corporations that hold real estate can risk unnecessary taxes. Real estate expenses are treated as ordinary expenses on the company’s income statement. If the property is sold, any profit is subject to double taxation, first at the corporate level and then at the owner’s individual level when proceeds are distributed. If you instead own real estate in a pass-through entity, and then lease it to your company, the profit upon sale would be taxed only once, at the individual owner level. Also, your operating business might be able to deduct lease payments so long as the rent is reasonable. 

To simplify matters, some business owners buy business real estate themselves. However, this can transfer the property’s liabilities directly to owners and put other personal assets — including the business interests — at risk. So, it’s generally best to hold real estate in its own limited liability entity. Just make sure your entity carries adequate insurance coverage. 

Pros to Help You Weigh the Advantages 

For most small to mid-sized businesses, the advantages of owning real estate separately outweigh disadvantages such as the need to manage separate finances, tax filings and legal structures. Our tax pros are here to discuss this strategy and determine what’s right for your situation.