Dental Commercial Property and and S-Corp Election

This is our one hundredth post. Nice milestone.

I have heard it said that the best way to go about owning a building and practice is to have the building set up as an LLC and the practice as an S-Corp, with the LLC renting out the building to your S-Corp practice.

Assuming this model is followed, would the following be legal:

Let’s say you own a building with enough space to house multiple businesses. You start off with your practice set up in one area/wing/whatever of the building and rent out the rest of it. Perhaps you plan to use the extra space in the future for expansion, but that really is not important. Commercial real estate hits a rough patch and your LLC comes dangerously close to failure. Your dental practice is still rather successful. Would it be legal to “renegotiate” and jack up the rental rate on your dental practice so as to help your commercial property LLC get through the tough times? The basic question here is whether or not it is legal to essentially use the rate charged to your practice to mediate the bumps felt by your commercial property. (I suppose the reverse of this situation is possible as well, with you lowering the rate charged to a struggling practice by your successful commercial real estate… but this situation seems unlikely at best)


Or you could simply use the S-Corp profits and lend them to the LLC to keep it afloat. Assuming you’re the sole owner of each both flow through to your ind. tax return so the net tax benefit will be the same.

Remember, the S-Corp needs to act in a prudent business fashion. If it’s already paying “fair market” rent and you didn’t own the LLC and the landlord asked you to renegotiate the lease to pay more rent, would you still do it? The answer is no.

Don’t make it more complicated that it needs to be.

And our good friend, Jason Wood, the Dental Lawyer adds:
 
The only thing I will add to this excellent answer is a real world experience as to why it should be done this way as opposed to renegotiating the rent and putting it in writing.

A client that contacted us after-the-fact had entered into an “above average rent” with his dental practice for the building that he owned. Because it was a part of the lease there was a paper trail. When he lost the building as a result of the economy we are in, the bank “relied” on the above market rental rate outlined in the lease to force the dentist to continue paying the above market rent.

In other words, don’t renegotiate your rent, do what Tim suggests instead. Lend the LLC money personally so that if you lose the building it isn’t attached to your separate entity.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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