Who should own the bricks?

IMG_1218-Joe Kristan is a founding member of Roth & Company P.C.

So the business is up and running, and you've decided you want to move into permanent space. After careful thought (considering the points discussed here), you've decided to buy the building that houses your business.

Who should own it?

The right answer needs to consider your tax structure and your estate and family planning.

Many older businesses are set up with the business owner having personal title to the real estate and renting it to the business. This remains a useful tactic:

- It gives C corporation owners a way to get cash out of their businesses without incurring taxable dividends. C corporation earnings are normally taxed twice - once on the corporate tax return as it is earned, and again as dividends when distributed.

- A variation of this can help with estate planning. The building is purchased by the next generation on a mortgage and leased to the business. The lease funds the debt service, and the equity buildup goes to the next generation. This can be an efficient estate planning tool.

- It can make it easier to sell your business. A buyer may not want the real estate, for any number of reasons. Getting appreciated real estate out of a business can be a tax nightmare. Closing a business sale is hard enough without complicating it with unwanted assets.

- Iowa's tax rules enable a tax-free sale of business real estate if it has been used in a business in which the taxpayer has "materially participated" for ten years -- if the land has also been held for ten years. A similar exclusion is also available if all of the assets of a business are sold, but that break doesn't apply to sales of part of a business, or to sales of corporate stock or partnership interests. Where the business sale has to be a stock deal, owning the real estate separately can allow at least part of the deal to avoid Iowa tax.

Reading between the lines, you may have deduced that owning real estate in a corporation can be awkward. If you already own real estate inside a corporation, it is probably best to leave it there. If you are acquiring new real estate, though, it is usually best to own it individually or in a partnership (including LLCs).

If your business itself is in a partnership format, including an LLC, it matters less who owns the real estate. It is much easier to shuffle assets into and out of a partnership without incurring tax than it is with a corporation (but not so easy that you should try it without tax advice).

Of course every situation is different. If you have co-owners of your business, ownership of real estate can become a sore point. You have to set a fair rent to keep co-owners and the IRS happy. Your lenders may have something to say about your decision. And you can't let the tax tail wag the business dog. Be sure to work closely with your tax and legal advisers before you commit to anything.

A referral program for electric cars

- Carl Maerz is a co-founder of Rocket Referrals.

I came across an article outlining a new referral strategy Tesla Motors is implementing for their Model S sedan. As might be expected at Rocket Referrals I try to stay atop developing trends in referral marketing. So staying “up to speed” with what Elon Musk is cooking up here only made sense.

This program appears to be consistent with other retail-oriented referral strategies we have seen in the past. It operates on the tell-a-friend-and-you-both-get-something credo.

Tesla_Broadcast_Tower_1904Current Model S owners share a referral link with their friends and, if they buy, both are rewarded with a thousand bucks in Tesla credit. There are other rewards for referring 5 or ten friends, such as an invitation to an premier party and the exclusive right to purchase a souped-up version of their Model X (their SUV variant).

When asked the reasoning behind this referral program, Elon Musk indicated that Tesla is exploring ways to lower its cost of client acquisition. More specifically, ways in which the company can cut down on marketing costs by driving prospects directly to its website to order their vehicle. He indicated that the company could save $2,000 for every prospect who skipped visiting Tesla's physical stores and instead just took their friend’s word for it.

The thing is, Tesla’s marketing budget is already next to nothing. They do none of the traditional advertising that the big car manufacturers do.

OK, so no Super Bowl commercials, but you have almost certainly heard of them. This is due to 1) word-of-mouth 2) leveraging the press 3) no-pressure show rooms

Tesla has been very successful at creating a buzz around its product. They are new. They are exciting. And they are green. I mean, since when have we had fast and attractive looking electric cars? Since 2008 to be exact, when Tesla released its first model, the Roadster. Even the name sounds crisp. They have developed a product known for breaking the mold and innovating on green energy. People talk about this kind of thing. And when they do, those with money consider taking out their pocketbook and placing an order. According to Tesla, this referral program is an effort at incentivizing existing clients to tell their friends, and to reward those who already do. The result would be a lower cost of acquisition.

That’s fine, but I think there is a much larger objective behind this referral program: to further the exclusivity of owning a Tesla.

Let’s be honest, $1,000 seems like little more than a pat on the back when compared to a price tag upwards of six digits. Let’s just say that the demographic that purchases a Model S sedan is probably not jumping through hoops to get a relatively small kickback. And thus is the real genius behind the referral program.

A small incentive is Elon Musk’s way of showing his appreciation to his customers who are actively referring their friends, while also promoting the establishment of an exclusive group of Tesla owners.

Exclusivity is felt throughout the Tesla brand. There’s no negotiating on price. There’s no network of franchised dealers. There’s a backlog of car orders lasting for months, or even years. Those who refer many friends get an invitation to an exclusive party, or the right to purchase an exclusive Tesla model.

This referral program is just another way that Tesla is creating a network of owners from a chosen demographic.

Why delegating authority increases your company’s value

- John Mickelson, Managing Partner Midwest Growth Partners, is IowaBiz's blogger on succession planning. Read more about him here. 

Many business owners have a difficult time delegating authority.  Fear of losing control, believing that they are best for the task, and a lack of time to adequately explain what needs to be done are all reasons not to delegate. In a perverse sense, many of these traits are what made them successful in the first place. 

However, all business owners will hit a point that in order to grow or transition ownership to the next generation, they need help. Finding and trusting employees who can carry out critical functions will allow for that growth. 

As a potential business buyer, Midwest Growth Partners likes to ask if business owners are able to leave their business for two weeks and not be needed. If the answer is yes, this shows the business is not built on one person. We find tremendous value in that and in turn businesses receive better valuations because less risk is associated with the business. 

We have seen several trends for business owners who delegate successfully including setting clear expectations for employees, letting employees know how they will be evaluated, that it is OK to make occasional mistakes, and then properly rewarding employees for outstanding performance.  

The most important thing though is giving your employees the authority required to do the job. Delegation is not really occurring if the employee has to check in with the business owner before they make a decision. 

Delegating authority can have a great impact on a business. It can also make the life of a business owner less stressful. Although it can be hard to give up some control of the business that you started, the potential rewards are worth it. 

This site is intended for informational and conversational purposes, not to provide specific legal, investment, or tax advice.  Articles and opinions posted here are those of the author(s). Links to and from other sites are for informational purposes and are not an endorsement by this site’s sponsor.