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Identifying the building First, M & G identified the build-
ing size and amenities that suited their needs. They planned for the growth they expected over the next 10 years. In addi- tion, they planned for future technol- ogy needs in terms of communications facilities, the image they wished to por- tray to clients, the proximity and ease of access to transportation hubs, and, not least importantly, the geographic area. Their specifications were shared with trusted employees, and modifications were made based on ideas generated in group discussions. The owners then began their search and quickly settled on a building in a business park about 10 miles from their current site.
A lease protects both the firm and the landlord by spelling out the rights and duties of each.
Negotiating the terms M & G negotiated with the owner
of the identified building regarding his price, terms, willingness to carry back secondary financing, and willingness to complete necessary repairs and tenant improvements. The owner was flexible because he had held the building unsold for some time. The buyer and seller settled on a set of mutually acceptable terms and signed a contract.
Structuring the entity to
hold the building M & G soon discovered that they
Sound management principles apply across a broad spectrum of small service-oriented businesses. In this article, Trends magazine casts its net wide to bring exceptional business insights and advice to bear on a key issue in business management for veterinary practices.
could hold title to the building in a vari- ety of ways, each of which had its own advantages and pitfalls in terms of liabil- ity and tax treatment. M & G discussed the legal implications with their attorney and the tax implications of the following methods with their CPA.
Limited liability company M & G’s attorney advised them that
they could structure building owner- ship as an LLC, with the major advan- tage being that it would be a legal entity separate from either M or G, and would therefore limit personal liability from
claims arising from the property. How- ever, M & G’s accountant pointed out four disadvantages of an LLC holding the property: 1. The cost of establishing an LLC, largely attorney fees, is significantly greater than for some other forms of ownership.
2. If an LLC has two or more owners, they must file partnership federal and state tax returns,1
which require most
taxpayers to seek professional (i.e., costly) tax preparation assistance.
3. In some states (e.g., California), an LLC, including a single-member LLC, is required to file a tax return and pay an annual fee based on gross revenue; the fee, which is $800 if the building makes no net income, can go as high as $11,790.2
4. Not only is the owner taxed on his portion of the net profits of the LLC, but losses may have limited deduct- ibility depending on the cash the owner has invested in the LLC.
Sole or joint ownership M & G’s attorney advised them that
the property could also be held under sole ownership (one owner) or as a ten- ancy in common or as joint tenants with right of survivorship (multiple owners). Under any of these structures, the attor- ney opined, unlimited liability falls on the owner of the building for any poten- tial claims against the property.3 M & G’s accountant told them that the
attractiveness of sole ownership or joint ownership versus an LLC is that it requires only one additional form on a personal tax return. Net rental income or loss on the property is taxed at ordinary income tax rates on the owner’s tax return. He also pointed out that these entrepreneurs can mitigate personal liability risks through the establishment of a comprehensive insurance policy. That said, the decision of which way to structure the entity holding the property should be based on the LLC fees and costs versus the cost of any extra insurance required because the property is held in the owner’s name.
Trends magazine, November/December 2010
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