Is Your Business Offering You Added Benefits?

Is Your Business Offering You Added Benefits?

Are you taking advantage of all the benefits of small business entrepreneurship? The typical expected financial benefits realized from small business ownership are: Earned Income and Unearned (investments, distribution of profits from the operation and/or sale of the business) Income.

Here's the scenario: Many businesses are tenants, likely under the terms of a commercial lease. There are many financial and strategic reasons for a small business to lease property, with the requisite tax deductions of the lease payment and associated disbursements. But there is no benefit for the owner of the business.

Now let's consider this from the hidden benefit side. As long as the business you own is structured correctly, you may be able to accrue benefits by personally owning the real estate your business operates in and leases from you. For example: Probable Inc. (PI), a small distributor, has a single shareholder, Ralph Probable. PI enters into a long-term, formal lease of the property it operates out of with the landlord, in this case the same Ralph Probable. Several benefits might be available to these two entities in an appropriate legal arrangement, including:

• Rent increases are more predictable and manageable. Lease renewal concerns also eliminated.
• As with any lease, lease payments and associated disbursements are still operating expenses.
• As owner and landlord, expenses necessary to deliver on the lease agreement, including mortgage interest, depreciation, maintenance, etc. may be deductible to Probable.
• Owner Probable could receive distributions from the property, even if the investment showed a loss.
• Inflation impacts rents vs fixed mortgage payments, supporting increase in distributions
• Once mortgage is discharged, the property becomes a cash-producing annuity for Owner Probable.
• A sale of the property, might be eligible for capital gains tax rate or other lower tax treatment favourable to Owner Probable.

Many family businesses have operated for decades. But at the end of the founders careers, it turns out that the business itself had little or no value to a prospective buyer without the real estate attached leaving retirement and future generation funding on the table. Talk to an advisor about how this advantage of owning business real estate might be appropriate for you and your situation.