You have found the right property for your business.
The location works. The numbers make sense. You are ready to make an offer.
But there is one important question that should ideally be considered before you sign the Offer to Purchase:
Who should actually own the property?
Should you purchase it in your personal name? Should your company own it? Or would a trust be more appropriate?
The name that appears on the title deed can have consequences that extend far beyond the property transfer itself.
The ownership structure you choose may affect tax, financing, risk, succession planning, administration and what eventually happens to the property when circumstances change.
There is no single ownership structure that is right for every property or every business owner.
At A de Bruyn Attorneys, we encourage clients to consider the bigger picture before committing to a property transaction.
The Property and the Business Are Two Separate Decisions
When purchasing commercial or investment property, it can be tempting to assume that the business using the property should automatically own it.
That is not necessarily the case.
Consider a business owner purchasing an office, warehouse, retail premises or other commercial property.
The property could potentially be purchased:
- in the business owner’s personal name;
- by the company operating the business;
- by another company established to hold property; or
- through a trust, where appropriate.
Each structure has different legal and practical implications.
The right choice will depend on the purpose of the property, how it will be financed, who is involved in the business and what the owners hope to achieve in the future.
Option 1: Buying Property in Your Personal Name
The simplest option may appear to be purchasing the property personally.
In this scenario, the individual becomes the registered owner of the property, even if the property is ultimately used by a business.
This structure may be appropriate in certain circumstances, but it is important to consider what personal ownership means in the broader context of your affairs.
Questions worth considering include:
- Will your business pay rent to you for using the property?
- How will the property be financed?
- What happens to the property if you sell the business?
- What happens if you pass away?
- How does the property fit into your estate plan?
- What are the relevant tax consequences?
- What exposure could the property have to personal financial risks?
Personal ownership should therefore not automatically be viewed as the easiest or most appropriate option simply because it involves fewer entities.
Option 2: Buying Property Through a Company
A company is a separate legal entity and can own immovable property in its own name.
For some business owners, purchasing property through a company may make commercial sense.
For example, the property may form an integral part of the company’s operations or investment strategy.
However, company ownership brings its own considerations.
These can include:
- how the purchase will be financed;
- the company’s existing financial position;
- tax implications;
- the rights of shareholders;
- what happens when shareholders change;
- whether the property forms part of the company’s operating assets;
- the effect of selling the company or its business; and
- what happens to the property if the company experiences financial difficulty.
Business owners should also consider whether they want the trading business itself to own a valuable property asset or whether separating the property from the operating business may be more appropriate.
This is a strategic decision that should be considered with appropriate legal, tax and financial advice.
Option 3: Buying Property Through a Trust
A trust may also be considered as a property ownership structure in certain circumstances.
Trust ownership is sometimes associated with estate planning, asset management and longer-term family planning.
However, establishing or using a trust to purchase property should never be treated as an automatic solution.
Trusts have their own legal, administrative and tax requirements.
Before purchasing property through a trust, it is important to consider matters such as:
- the purpose of the trust;
- the provisions of the trust deed;
- who the trustees and beneficiaries are;
- whether the trustees are authorised to enter into the transaction;
- how the property will be financed;
- the tax implications of trust ownership;
- ongoing administration and compliance; and
- the long-term purpose of holding the property in the trust.
A trust should have a genuine purpose within the client’s wider financial and estate planning rather than being selected simply because it is perceived to offer a particular advantage.
Think About What Happens When You Eventually Sell
When purchasing property, most people understandably focus on acquiring it.
But the way you buy the property today can influence your options tomorrow.
Ask yourself:
What happens if I sell the business?
What happens if another shareholder joins or leaves?
What happens if I want to sell the property but keep the business?
What happens if the company is sold?
What happens if I retire?
What happens if I pass away?
Considering your exit strategy before buying can help you identify potential complications while there is still time to structure the transaction appropriately.
Business Property and Succession Planning
Commercial property can become one of the most valuable assets associated with a business.
That makes succession planning particularly important.
If property is owned personally, your estate plan should address what happens to it when you pass away.
If the property is owned by a company, changes in ownership or control of that company may become relevant.
Where a trust owns the property, the trust deed and administration of the trust become important.
Business succession and estate planning therefore often overlap with property ownership.
The structure should not only work for your business today. Ideally, it should also make sense in the context of your longer-term plans.
Don’t Wait Until After Signing the Offer to Purchase
One of the most important times to obtain advice is before signing the Offer to Purchase.
Changing the intended purchaser after an agreement has already been concluded is not necessarily as simple as replacing one name with another.
It can create legal, contractual, financing and tax consequences.
If you are unsure whether the property should be purchased personally, through a company or through a trust, consider the structure before making the offer.
A little planning at the beginning of a transaction can prevent significantly more complicated problems later.
Make the Ownership Decision Before the Property Decision Becomes Final
Purchasing business property can be an important step in building long-term value.
But deciding what to buy is only part of the process.
Deciding how it should be owned deserves just as much consideration.
At A de Bruyn Attorneys, our property and conveyancing team can assist with the legal aspects of commercial property transactions and help you understand the implications of different ownership structures as part of the wider transaction.
Where appropriate, legal advice should also be considered alongside specialist tax, accounting and financial advice to ensure that the structure reflects your particular circumstances and objectives.
Considering purchasing property for your business or investment portfolio?
Get legal advice before deciding how your business property should be owned. Speak to the team at A de Bruyn Attorneys.
