Can I Lease Land and Equipment to My Company?

For business owners considering the structuring of their assets and operations, leasing land and equipment to an operating company can offer significant advantages, especially in terms of tax savings, liability reduction, and asset protection. This article explores the practical and legal considerations of owning operations in one entity and leasing land and equipment from another entity, specifically using limited liability companies (LLCs).[1]

Entity Structure and Setup

1. Establishing Two Separate LLCs: In Florida, you can establish two separate LLCs—one to hold and manage land and equipment assets (Leasing LLC), and another to handle operations (Operating LLC). Each LLC should be properly registered with the Florida Department of State by filing the Articles of Organization and paying the necessary fee.
2. Operating Agreements: Each LLC should have an operating agreement that outlines the management structure and operational rules. For the Leasing LLC, it’s a good idea to specifically state its purpose as leasing assets to the Operating LLC.
3. Ownership Structure: Ownership can be structured in a variety of ways depending on the goals of the business owner. The same individuals can own both LLCs, or different parties might be involved if bringing in investors or partners.

Legal Considerations

1. Lease Agreement: A formal lease agreement between the Leasing LLC and the Operating LLC should be drafted. This agreement should specify lease terms, rental rates, duration, renewal options, and maintenance responsibilities. It's crucial to ensure that the lease terms are commercially reasonable to avoid IRS scrutiny.
2. Compliance with Local Zoning and Land Use Laws: The Leasing LLC must comply with local zoning laws and ordinances in Florida. This might involve obtaining the necessary permits and ensuring that the property's use as described in the lease is permitted under local law.
3. Liability and Insurance: Separate LLCs help isolate liabilities. For instance, if the Operating LLC faces a lawsuit, the assets within the Leasing LLC could be protected. Each LLC should have adequate insurance coverage tailored to its operational risks.

Tax Considerations

1. Pass-Through Taxation: LLCs typically benefit from pass-through taxation, where earnings and losses pass through to the owners' personal tax returns, avoiding double taxation. However, lease payments from the Operating LLC to the Leasing LLC are treated as business expenses for the former and income for the latter. Note: this is an especially important area to discuss with your tax professional.
2. Property Tax: Property taxes will be an obligation on the Leasing LLC as the owner of the land and equipment. In Florida, property tax rates and exemptions can vary significantly by locality.
3. Sales Tax on Lease Payments: In Florida, lease payments for the use of tangible personal property are generally subject to sales tax. It's important to consult with a tax advisor to ensure all state and local tax regulations are met.

Note: you may have sales tax benefits both LLCs can reap by owning and leasing equipment between two separate LLCs. Done right, this can provide significant tax savings over time.

Operational and Financial Strategy

1. Managed Services Agreement: In addition to the lease, the Operating LLC can enter into a managed services agreement with the Leasing LLC. This agreement would cover services such as maintenance, repairs, and upgrades of the leased equipment, providing an additional layer of operational efficiency.
2. Financial Benefits: By charging market-rate rent, the Leasing LLC can create a reliable income stream, while the Operating LLC can deduct these lease payments as business expenses. Notably, “market rate” is not always so easy to calculate. A trained legal and tax advisor can help in properly determining the optimal rent.
3. Flexibility in Business Operations: This structure allows the business owner to expand or contract operations without the need to buy or sell expensive assets. The Operating LLC can focus on its core business without the burden of asset management.

Practical Example

Consider a scenario where an entrepreneur purchases a carwash property in Orlando and forms an Asset LLC to hold this property and the carwash equipment. A separate Operations LLC is established to manage the carwash, employing staff, marketing services, and handling daily transactions. The clear separation of assets and operations not only simplifies financial management but also significantly mitigates risks associated with the business operations.

Conclusion

Leasing land and equipment to your company via separate LLCs in Florida is a viable strategy that can offer flexibility, tax benefits, and liability protection. However, it requires careful planning and adherence to legal and tax regulations. Business owners should consult with legal and tax professionals to tailor the structure to their specific circumstances and ensure compliance with all relevant laws and regulations. If you have questions on structuring your businesses, call the Business attorneys at MSD Business for a free consultation.

Additional Resources

FL Sales Tax Rate on Commercial Rent – Down to 2% Plus Local Rate!!!! Matthew Parker, Esq. April 9, 2024.

Florida Sales Tax - Commercial Real Property Rental David Brennan, Esq. December 18, 2023.

Florida Business Lawyer: Florida Commercial Eviction – A Practical Guide for Landlords W. Chase Carpenter, Esq. October 11, 2023.

Financial Disputes In LLCs: Understanding and Managing the Key Issues In Florida W. Chase Carpenter, Esq. March 21, 2024

About the Author:

Chase Carpenter is a partner in the Business Division of Law Offices of Moffa, Sutton, & Donnini, P.A. His practice revolves around business transactions and business litigation. Mr. Carpenter handles a wide range of cases including contract drafting, partnership disputes, commercial leases, and construction litigation. These cases encompass diverse industries, including healthcare, technology, real estate investment, and government contracting.

About the Firm:

The Law Offices of Moffa, Sutton, & Donnini, P.A., also known as MSD Business, is a local business law firm in Tampa, FL, serving clients throughout Fort Lauderdale and statewide. Our firm has a long history of helping clients navigate all types of complex legal matters, including local and state tax issues. In our business law practice, we assist clients with everything from mergers and acquisitions to contract disputes, business litigation, general counsel, and more.