Business owners looking to grow and expand their businesses often do so by acquiring new assets, buying real estate, venturing into a new industry, or by acquiring an existing business. In many of these situations, it makes sense for business owners to establish a new entity to operate the new business or to hold the new assets. There are a number of reasons you may want to consider forming a new entity in this New Year.
Different Business Owners or Investment Structure
In some cases, business owners may want to form a separate entity for their new venture to allow for a different ownership and/or investment structures from that of their existing business entity. This could be because the business owners wish to contribute different amounts of capital to the venture without changing the current ownership structure. It may also be the case that the business owners wish to bring on new business partners or outside investors without affecting the existing business. While establishing a new entity for these reasons is a fairly common occurrence, it’s important to talk to your business advisors and review any Shareholders’ Agreements, Bylaws, or Operating Agreements you have before doing so to ensure you’ve accurately disclosed pertinent details to your business partners and taken the necessary steps to move forward with the new venture.
Tax or Incentive Advantages
Depending on the tax structure of your current business and any tax incentives being offered to your business by local government it may make sense to set up a separate entity for your new or newly purchased business. This is a decision your accountant and business attorney can help you explore.
Keep in mind, especially when dealing with larger tax incentives, the size of your project is a factor in determining a business’ eligibility to receive tax incentives, certain localities may require the project to be conducted by a single entity while others allow for multiple entities to work on one together. For example, a local government’s tax incentive allowed a company and its subsidiaries to make $10 million investment in the local area in exchange for a $3 million incentive payable to the parent company, who then forms a new entity to hold real estate in the area and another to hold the equipment; these entities then work together to make the requisite investment.
If business is expanding and looking to set up a new branch in a different state or country, it may be best to set up a new entity to handle the new business’s interests and to help keep the paperwork and finances straight. This can help you organize and separate your operations and books by location. A business that specializes in angel investments or venture capital funding, with a focus on providing guidance to complex tech projects may want to create a new business to hold investments in startup companies they’ve helped over the years. A business acting as management company, which operates several different and unrelated businesses, may want to operate each of those business as a subsidiary to help keep their operations, books, and assets separate from itself and its other ventures.
Separation of Asset
As mentioned above, many businesses are organized such that expensive assets, including real estate and industrial equipment are held by subsidiary entities, which keeps them separate from the central, operating company. Depending on the type of business and the assets involved, you may choose to do the same. For example, if you rent out a portion of your office building that you use as your company’s headquarters, you may have a separate entity that holds the building to help ensure that any liabilities arising from the office building don’t adversely impact your company.
Real Estate Holdings
Real estate is an asset commonly held in a separate entity and the purchase of real estate is often a reason for a business to create a separate entity to hold the new location. Indeed, there are sometimes tax advantages and incentives offered to real estate companies that are set up certain ways that may not otherwise be available. Before you complete a real estate purchase, it may be worth having a chat with your business attorney to determine if setting up a real estate holding company makes sense for your business.
For many business owners, a real estate purchase provides an asset that’s separate and distinct from their core business. Further, even if your business currently uses the whole space, future growth or changes may mean moving out of your existing space into a new location and renting out their property to another business. If you retire or sell your business, you could continue to receive rent from the property through the real estate holding company. These and many more situations make real estate holding companies an attractive option.
The right decision for you and your business will depend on certain, key factors, from the business type to the ownership to the long-term plans. Developing a relationship with a business attorney who can guide you through your growth is key for success. DeAnn Chase and her team at Chase Law Group, P.C. are experienced at helping businesses that are just getting off the ground as well as those rapidly expanding through their own growth or by acquiring a new business. You can reach us by calling (310) 545-7700 to set up a consultation.