Liability Protection
By transferring ownership of your company's facilities to a separate limited liability entity, such as a corporation or a limited liability company, and by maintaining its separate existence, you can effectively isolate the facilities from creditors of your operating company. If there is an accident for which your operating company is responsible, the liability may be isolated to the operating company thereby shielding your facilities if the facilities were not a cause of the accident. Moreover, if you currently own your company's facilities in your individual name and there is an accident related to the facilities, the stakes are even higher since the accident could jeopardize your personal assets. In this case, transferring ownership to an entity could shelter all of your personal assets from claims originating from the facilities. Based on these considerations, shifting ownership of your facilities to an entity could be the cheapest insurance you will ever buy.
Income Tax & Employment Tax Reduction
One tax benefit of owning your company's facilities in a separate pass through tax entity (an entity that is not a separate taxpayer such as a limited liability company) is the ability to mitigate the impact of the two levels of income taxation imposed on C corporations. The first level of tax is paid by the C corporation on its income. When the C corporation pays out a dividend, the second level of tax is collected on the dividend at the shareholder level. If the corporation and shareholder(s) are each taxed at the highest marginal rate, these two taxes could amount to an effective income tax rate of 78.6%. A payment by the corporation to the owner in the form of rent, however, is not a dividend. It is simply an expense of the corporation and income to the owner of the real estate. Shifting income to the real estate owner in this way reduces the income taxed at the corporate level and avoids double taxation of the rental payment.
By recharacterizing distributions to you from the company as rental payments rather than as salary, you may also be able to reduce your employment tax burden. Like your salary from the company, rental payments are deductible by the company. Unlike your salary, however, there are no employment taxes withheld on rental payments. As a result, by using a separate real estate ownership entity you may be able to take more cash out of the company while simultaneously reducing employment taxes by paying yourself more in rent and less in salary.
Estate Tax Reduction
Another benefit to owning your facilities in a separate entity is the potential for the reduction of estate taxes which can be as high as 55% on a marginal basis. A properly structured entity could permit you to transfer a significant portion or all of your ownership of the facilities to others, including family members, while allowing you to retain control of the facilities. As a result, you could potentially remove almost the entire value of your company's facilities from your estate while still maintaining control during your lifetime. This would directly reduce your estate tax liability and preserve assets for your beneficiaries. In addition, you may also be able to reduce income taxes by transferring some of the rental income from the facilities to other family members in lower income tax brackets.
Real Estate Transfer Tax Elimination
Finally, if you have transferred your real property to a separate entity for legitimate business purposes, you may also be able to avoid paying transfer taxes on that real estate when you or your successors sell it. State and county transfer taxes on real estate in Michigan presently amount to $7.50 for every $1,000 of value. For facilities valued at $2,000,000, this amounts to $15,000 in transfer taxes. By selling the entity that owns the real estate, instead of the underlying real estate itself, you may be able to avoid these taxes entirely since there are no transfer taxes on the transfer of an ownership interest in an entity.
If the techniques mentioned above sound appealing you should consult a competent tax and business advisor for more information. Not all of these techniques will make sense in every situation, but in those where they do, the savings can be both direct and substantial.