Buying a building for my business -- independent entity?

Question

Hi folks.  My wife and I are starting up a new business with an target open date of Jan 2023.  We are considering renting a space to use but also have an option to purchase a building which looks like it will fit our needs as well.

I'm looking at 2 options and could use some opinions:

1) The business buys the building and just pays what ever debt service is required

2) we setup a new LLC which buys the building. The business LLC then pays rent to the property LLC.

We would be the sole owners of both LLCs either way so I suspect the tax / deductions wouldn't really matter.  It may be worth us having the building ownership in a separate LLC for lawsuit protection reasons.

A further consideration is that we could eventually be in a position to sell the business and having the building in a separate LLC would allow us to keep that as an independent revenue line.

Thoughts folks?

Thanks all!

Dan Wallace · Answer

I finance these type of owner-occupied projects and 99% of my clients set up separate entities, one SPE (special purpose entity) to own the RE, and one to operate the business for the reasons detailed above.

Trent Wyss · Answer

I would have to agree with the majority. Two LLC's is the best for both liability reasons and separates an operating business from a passive one.

Megan Templeton · Answer

Hi there! I would recommend using the dual LLC set up that you have suggested. One LLC would be the asset holding LLC for the building and one would be the operations for the business. This does separate out your liability so that if the business is ever sued, the property would be protected. It does also provide you flexibility for a future exit strategy as you could sell the biz and continue to rent the property for passive income. The key piece is making sure you maintain a rental agreement between the biz and property to formalize the setup. Dual LLCs will also help with building biz credit, deductions for the property, and can be useful for alternative retirement accounts such as a solo 401k if you ever wanted to go in that direction.

Scott Wolf · Answer

@Brandon Palmer, I vote for two LLCs.  Especially if you can find a building with other tenants.  In my previous life as a commercial broker, most of my clients that bought buildings for their businesses ended up with the value of the RE being greater than the value of the business.  By separating the two, you have an asset that can be passed down to future generations, or something with more concrete value to sell or continue to hold to generate cash flow.

Ronald Rohde · Answer

The main differences will be financing cost and liability.

With two LLCs you will shield half of your value from the other one. Its much easier to divest if you think you'd want to sell the business and lease in the future, keep the building for rental income.

Owner occupied financing is some of the lowest CRE rates you can get, like 1%...

Scott R. · Answer

I’m in Seattle, considering the same option.  Will be curious to see what you choose.  I’m leaning toward having my business LLC pay rent to the building LLC.