Why Business Owners Should Consider Keeping Their Building Separate From Their Business Operations
Many business owners work hard for years to purchase the building where their company operates. The business may be a restaurant, nightclub, retail store, auto repair shop, warehouse, salon, medical office, or another commercial operation.
But there is an important question business owners should consider:
Should the company that owns your building be the same company that operates your business?
In many situations, business owners and their legal and tax advisors choose to place the commercial real estate in a separate legal entity, such as a separate LLC, and have the operating company lease the property from the building-owning entity.
There can be several reasons for doing this, including asset protection, liability separation, business succession, and insurance planning.
The Building and the Business Have Different Risks
Your commercial building is an asset. Your operating business creates day-to-day exposures.
For example, imagine a business owner owns a building worth $1 million and operates a nightclub inside it.
The nightclub may face exposures involving:
- Customers slipping and falling
- Alcohol-related incidents
- Assault and battery allegations
- Security or bouncer incidents
- Employee injuries
- Food-related claims
- Professional or operational negligence
- Auto-related exposures
- Contractual disputes
The building itself has a different set of exposures, such as fire, wind, hail, water damage, premises liability, and loss of rental income.
When the same legal entity owns the valuable real estate and conducts higher-risk business operations, an operational liability claim may potentially put assets belonging to that entity at risk.
That is one reason business owners should discuss separating the ownership of valuable real estate from the company conducting the daily business operations with their attorney and CPA.
How a Separate Building Entity Can Work
A common structure may look something like this:
ABC Property Holdings, LLC
Owns the commercial building.
↓
Lease Agreement
↓
ABC Restaurant, LLC
Operates the restaurant inside the building.
The property LLC acts as the landlord, while the operating company acts as the tenant.
Although the same individual may ultimately own both companies, they are separate legal entities when properly established and maintained.
This can also make the insurance structure much clearer.
The Building Owner Needs Its Own Insurance
The entity that owns the commercial property should generally have insurance written in the correct legal name of the property-owning entity.
Depending on the situation, coverage may include:
Commercial Building Coverage: Protects the physical building against covered causes of loss such as fire, wind, hail, and certain other losses.
Premises or Lessor's Risk Liability: Provides liability protection for certain exposures associated with owning and leasing the property.
Business Income/Rental Value Coverage: May help protect the building owner's rental income following a covered property loss.
Equipment Breakdown: Can provide protection for certain mechanical, electrical, HVAC, and other equipment breakdown losses when properly covered.
The building policy should also correctly identify the mortgage company or lender when required.
The Operating Business Needs Its Own Liability Coverage
The company actually conducting business at the location should carry insurance appropriate for its operations.
That may include:
- Commercial General Liability
- Business Personal Property/Contents
- Business Income
- Workers' Compensation
- Commercial Auto
- Professional Liability
- Cyber Liability
- Employment Practices Liability
- Liquor Liability
- Assault and Battery Coverage
- Umbrella or Excess Liability
The exact coverage depends heavily on what the company does.
A restaurant has very different exposures from a roofing contractor. A nightclub has different exposures from an accounting firm. An auto repair facility has different exposures from a retail clothing store.
Why This Matters for Higher-Risk Businesses
The separation can become particularly important when the operating business has significant liability exposure.
Consider businesses such as:
- Bars and nightclubs
- Adult entertainment establishments
- Restaurants serving alcohol
- Auto repair and body shops
- Contractors
- Trucking companies
- Manufacturing businesses
- Towing companies
- Childcare operations
- Certain healthcare businesses
Suppose a business owns a valuable commercial building and also operates a high-risk business under the exact same entity.
A serious lawsuit against the operating company could potentially involve assets owned by that company—including the real estate.
Separating the real estate into another properly structured entity may create an additional layer of separation between the operational exposure and the real estate asset.
However, forming another LLC by itself is not a guarantee of asset protection. Business owners should work with an attorney to properly structure the entities and maintain the legal separation between them.
Don't Forget the Lease Agreement
Having two LLCs on paper isn't enough.
If one entity owns the building and another operates the business, there should generally be a legitimate lease agreement between the entities.
The lease can establish important responsibilities such as:
- Who is responsible for maintaining the premises
- Who is responsible for repairs
- Insurance requirements
- Liability requirements
- Indemnification provisions
- Additional insured requirements
- Who is responsible for property improvements
- Responsibility for taxes and other expenses
An attorney should prepare or review the lease because these provisions can significantly affect both liability and insurance coverage.
Additional Insured Status Can Be Important
The property-owning LLC may also require the operating company to name it as an Additional Insured on the operating company's General Liability policy when appropriate.
For example:
Property Owner: Jones Property Holdings, LLC
Operating Company: Jones Restaurant Group, LLC
The restaurant's General Liability policy may name Jones Property Holdings, LLC as an Additional Insured as required by the lease.
This does not replace the property owner's own insurance. Instead, it can provide an additional layer of protection depending on the circumstances of a claim and the wording of the policies and endorsements.
What About Contents and Business Personal Property?
Another issue we frequently see is confusion over who owns the contents inside the building.
The building-owning LLC might own the real estate, while the operating company owns:
- Furniture
- Computers
- Inventory
- Machinery
- Kitchen equipment
- Tools
- Fixtures
- Supplies
- Point-of-sale equipment
Your insurance agent needs to know which entity actually owns the property so the policies can be written correctly.
A $1 million building owned by one LLC and $250,000 of business equipment owned by another company should not automatically be treated as though everything belongs to the same entity.
Separating the Companies Doesn't Mean Separating Everything From Insurance
This is where an experienced commercial insurance agent can help.
When we insure a business with separate property and operating entities, some of the first questions we ask are:
Who owns the building?
What is the exact legal name shown on the deed?
Who operates the business?
Are they separate LLCs?
Is there a written lease between the companies?
Who owns the contents and equipment?
Which entity employs the workers?
What does the lease require each company to insure?
These details matter.
If your deed says ABC Properties, LLC, but your insurance policy lists only ABC Restaurant, LLC, that should be reviewed. The insurance structure should accurately reflect the actual ownership and operations.
A Valuable Building Deserves Proper Protection
Commercial real estate can become one of a business owner's most valuable assets.
If you spent years building equity in a commercial property, it makes sense to consider whether that property should be held in the same entity that carries your company's everyday operational risks.
There isn't one structure that's right for every business.
Before transferring a building or changing ownership, speak with a qualified business attorney and CPA. Changing ownership can have legal, tax, lending, title, lease, and insurance consequences.
Then make sure your insurance agent understands exactly how the ownership structure works.
Commercial Building & Business Insurance in Georgia
At Jones Group Insurance Services, we help Georgia business owners evaluate both sides of their insurance needs—the company operating the business and the entity that owns the commercial property.
Whether you own a restaurant, retail store, nightclub, office building, warehouse, auto-related business, or other commercial property, we can help review how your building, contents, and liability exposures are currently insured.
We provide commercial insurance solutions throughout Georgia, including Atlanta, Marietta, Acworth, Kennesaw, Woodstock, Canton, Smyrna, East Cobb, Cobb County, Paulding County, and surrounding communities.
Jones Group Insurance Services
770-933-7929
3459 Acworth Due West Rd NW, Suite 319
Acworth, GA 30101