Should You Use a Separate Entity to Buy Property?
Updated: May 17
Your business (a corporation with several shareholders) has been renting office space. Your lease is about to expire. You have some extra cash in your business and can obtain a commercial loan from your bank to finance the purchase of a building or office condo for your business. You'd rather own the office than pay someone else rent. Who should buy the building? Your corporation? The shareholders who own the corporation?
You should seriously consider starting a new limited liability company to buy and own the property, unless you have some unusual circumstances. Think of a legal entity (i.e., corporations and LLCs) as a bucket. The bucket contains the assets and revenues of the business from which its liabilities are satisfied. The business' debtors can get at anything in the bucket to satisfy debt. If you buy the property with your existing corporation, you expose your business' assets and revenues to potential claims against the property (or for things that happen on the property). If you create an LLC to own the property, you create a bucket separate from your business that contains only the property. Putting the property into an LLC created only for the purpose of owning the property (sometimes called a "single-purpose LLC") puts a wall of protection between your business and the property.
Likewise, if the shareholders of the business were to buy the property in their individual capacities, they would be exposing their personal assets (e.g., personal bank accounts, houses, vehicles, boats, etc.) to liabilities arising out of the property. Creating a new LLC to own the property would protect their personal assets.
Note that in many instances, however, a lender can get around that protection by requiring the individuals and the operating company to sign guaranties for the loan (see this blog post about personal guaranties: https://www.joelankney.com/blog/why-do-creditors-require-personal-guaranties). Guaranties don't negate the reasons to have an LLC because the LLC still can protect the individuals and the operating company from other property-related debts.
Using an LLC to own property that your operating company leases also might have positive tax effects - ask your CPA.