Another frequent question I receive is whether a business asset (normally buildings and vehicles) should be owned individually or in the corporate name. Here is my response to a client who asked about an office building.

There is no cut and dried answer to the best way to own business assets, personally or in a corp. There are pros and cons to each tactic.

However, from a general sense, it is more advantageous to own real estate individually and lease it to the corp. This accomplishes a number of things. It allows you to pull income out of the corp that is not subject to payroll taxes. When you sell the property, the long term capital gains rates are lower for individuals than they are for corps.

The only big advantage I can think of for owning the building in the corp name has to do with liability. If someone were to get hurt in or on the business property, having it owned by the corp would prevent any lawsuit or judgment from going against your personally owned assets.

If you are going to keep the property in your personal name, you do need to clean up the payment stream. The corp should be writing you a monthly check for rent, and you should be making the loan payments out of personal funds. For loan payments already made out of the corp account, you should categorize them in your QuickBooks as rent expense and pick up equal amounts on your personal QuickBooks as rent income.

As I’ve long said, there are few areas with more confusion than having to deal with the growing number of kinds of IRA accounts. This will only get worse as our rulers add more and more different flavors of specialized savings accounts to the tax code.

Besides tax questions, the most common inquiries I receive have to do with how to appraise the value of a small business, either for possible purchase or sale. The actual details of how to do this are too much to include here. However, this is how I answered a client’s recent question about possibly buying an existing business.

Business valuations are very tricky because the values can have a wide range. Basically, the low end is the distress sale value; what you could get if you held an auction for the hard assets with very short notice.

The high side of a business valuation is capitalized earnings. You look at the expected net profit without deducting anything for interest, depreciation, income tax, or owner compensation. You then divide the annual expected net income by the rate of return you want to earn. For example, if you want to earn 20%, you would divide the net of (using your figure) $150,000 by 0.20. This gives a value of $750,000. The higher the capitalization rate you use, the lower the valuation and vice versa (lower rate = higher valuation).

So, we end up with a very wide range of acceptable values for the business. Your goal, as well as the seller’s, is to come to an agreement somewhere in between.

I’m sorry I can’t be more definitive; but that just isn’t possible with a business purchase.

I’d be glad to discuss the various options in more detail if you want.

This reminds me of the controversies around business values during the dot-com stock bubble of the 1990s. I wrote several articles decrying how insane and unjustifiable the prices were, and I was severely criticized by some financial pros who claimed that old valuation methods were obsolete for the new modern era. I stuck to my guns and was obviously proven right.

If a company has no hard assets or profits, the only reason to pay anything for its stock is based on pure speculation, or what is often called the “greater fool theory.” The only way you can ever expect to recoup your investment is if someone more ignorant than you are can be found to buy the stock from you. The entire run-up in the dot-com stocks was based on that premise and as was inevitable, the supply of fools eventually ran out.

Unfortunately, we are destined to see this exact behavior again, as the collective memory of the public is so short and the ability to learn from past mistakes is very limited.