Should you set up an SCI to hold your professional real estate?

If the real estate is held through professional assets

This results, from an accounting point of view, in the registration of the building in the company's balance sheet, whether the premises are acquired by the individual entrepreneur or by the operating company. 

Advantages:
 

• Management is facilitated: all the assets are brought together within the same structure.
• Acquisition costs and loan interest are deductible from the company's results.
• Listing real estate on the asset side of the balance sheet can allow the company director to benefit from a specific reduction on the value of the buildings at the time of the transfer of the company, free of charge (Dutreil Pact).
• The contractor may depreciate the constructions, which means that he may deduct an amount from the annual result, corresponding to a fraction of the value of the building, according to the duration of its use.

Disadvantages:

• The transfer of the business is more complicated; Listing the building increases the value of the assets on the balance sheet, which makes it more expensive to sell the business; If the entrepreneur decides to keep the building, to rent it, he will have to leave the balance sheet, which will generate taxation for capital gains.
• If the company encounters difficulties, the real estate listed on the balance sheet will not be protected from liquidation and shall go through the same fate as the goodwill in the event of receivership or compulsory liquidation. However, the premises which serve as a principal residence are exempt from seizure by law.

Moreover, to avoid these drawbacks, business leaders have become accustomed to acquiring the building which is intended to house the activity within the framework of a property investment company (SCI) constituted for example with their spouse.

If the real estate is held by a property investment company (SCI)

The business manager, rather than having the building acquired by his business, can, on the contrary, decide to hold it within his private assets. The acquisition is made either by the company manager personally, or through a civil company in which he holds almost all of the share capital, and which shall lease the building to the company.
 

The professional SCI is a civil company whose corporate purpose is the management of real estate assets; consisting of premises used in the context of a professional activity. The SCI is made up of at least two partners. It makes it possible to distinguish real estate from commercial exploitation. It is an alternative for the direct management of business premises.

Good to note: The SCI does not need a minimum capital when it is set up. The liability of the partners is unlimited, in proportion to their participation in the share capital. The SCI is in principle subject to income tax but has an option for corporation tax. As for the management of the SCI, it is entrusted to a manager, natural or legal person, partner or not. The real estate civil society (SCI) then makes the acquired building available to the company by means of a lease.

Disadvantages:

• Acquisition costs and borrowing interest are not deductible from the company's results.
• The building is not depreciable.

 Advantages:

• The professional building is in principle protected from a procedure that would affect the company.
• Loan interest is deductible from property income.
• In the event of sale and subject to income tax option, taxation on capital gains is that of individuals: complete exemption after 22 years of ownership (30 years for social security contributions).
• When the company is subject to corporate tax, its real estate capital gains are considered as traditional results.
• The SCI can be a tool for managing professional assets, facilitating its transmission to the benefit of one's children. The integration of new partners can be done by selling shares in the SCI. It is then possible to take advantage of the allowances offered for donations, in order to reduce the tax base. In addition, it is possible to resort to the dismemberment of ownership, which means to give only the bare ownership while retaining the usufruct (the right to enjoy and collect income). The value of bare ownership is lower than the value of full ownership.
• The entrepreneur builds up real estate assets through the SCI without having to personally pay the costs and expenses of the goods. The cost of the work and the loan repayments are deducted from the profits of the SCI, while the rents paid are deductible from the income of the professional activity. Please note: Rents are only deductible if they are in line with the market price.
• When the SCI realizes a deficit, the partners can report this land deficit on their declaration in order to reduce the amount of their property income and to charge part of the deficit to their overall income.

A personalized and in-depth analysis of your financial situation will make it possible to refine the interest of constituting or not an SCI. If so, it will be essential to pay great attention to the drafting of the statutes, and the commercial lease, to publish a notice of creation in a newspaper of legal announcements, to register the company online on the business formalities counter (formalites.entreprises.gouv.fr), hold general meetings and independent accounting.

Remains to be investigated:

• taxation (option for corporation tax instead of income tax),
• the mode of financing ("classic" credit or leasing) or other more "sophisticated" methods of acquisition (construction lease, long lease…).

Find a notary

Contact your notairy before you begin any projects. Your notary specialises in property and family matters and will advise you.