You’re buying commercial property with a business partner, family member, or investment group. You agree on the property and the business plan. Then someone asks: how should we structure the ownership?
This isn’t a minor detail. How you own property together affects your taxes, your liability, what happens when someone wants out, and what happens when someone dies. Getting the structure right from the beginning prevents expensive problems later.
Let me walk you through the different ways to own commercial property with others and how to choose the right structure for your situation.
The Basic Options
When multiple people own property together, you have several structural choices:
Joint tenancy, where co-owners have equal undivided interests with right of survivorship.
Tenants in common, where co-owners have separate interests that can be unequal and don’t include survivorship rights.
Partnership, where partners own property through a partnership structure.
Corporate ownership, where a corporation owns the property and co-owners hold shares.
Trust ownership, where property is held in trust for beneficiaries.
Each structure has different legal, tax, and practical implications. Let’s look at each one.
Joint Tenancy
Joint tenancy is common for married couples buying residential property, but it’s rarely the right choice for commercial property owned by business partners or investors.
In joint tenancy, all owners have equal rights to the entire property. You can’t have unequal shares. Three joint tenants each effectively own one-third.
The defining feature of joint tenancy is right of survivorship. When one owner dies, their interest automatically passes to the surviving owners. It doesn’t go through the deceased’s estate or according to their will.
This automatic transfer might sound convenient, but it creates problems for business partners. If your business partner dies and you automatically become sole owner, their family gets nothing. This probably isn’t what anyone intended.
Joint tenancy can also be severed unilaterally. One owner can convert their interest to tenancy in common without the others’ consent. This creates uncertainty.
For commercial property owned by unrelated business partners, joint tenancy is almost never appropriate.
Tenants in Common
Tenants in common is the most flexible basic ownership structure. Each owner has a separate interest in the property that they can deal with independently.
Owners can have unequal shares. One partner might own 60%, another 40%. Or three partners might have 50%, 30%, and 20%.
There’s no right of survivorship. When an owner dies, their interest passes through their estate according to their will. Their family or chosen beneficiaries receive it.
Each owner can sell, mortgage, or gift their interest without the others’ consent, though practical and legal restrictions often apply.
Tenants in common works well for business partners who want separate, clearly defined interests that they control individually.
The Co-Ownership Agreement
Whether you choose joint tenancy or tenants in common, you need a co-ownership agreement. This legal contract governs how the co-owners will manage the property.
A comprehensive agreement addresses:
Each owner’s share and financial contribution.
How decisions are made. Unanimous consent for major decisions? Majority vote? Different thresholds for different types of decisions?
How expenses are shared and what happens if one owner doesn’t pay their share.
How income is distributed.
Rights and restrictions on selling or transferring interests.
What happens if an owner wants out. Rights of first refusal? Forced buyout provisions?
Dispute resolution procedures.
What happens when an owner dies or becomes incapacitated.
Operating without a co-ownership agreement is asking for problems. Disputes arise, and without a clear agreement governing them, you end up in court.
Partnership Structures
Partnerships are a common structure for commercial property ownership, especially when the co-owners are actively involved in managing or operating the property.
A general partnership is simple to form but provides no liability protection. All partners are personally liable for partnership debts and obligations.
A limited partnership has general partners who manage and bear liability, and limited partners who invest but have limited liability and limited management rights.
Limited liability partnerships provide liability protection to all partners and are common for professional services, though they’re less common for real property ownership.
Partnerships are flow-through entities for tax purposes. Income and losses flow through to partners’ personal tax returns. This is often tax-efficient but creates complexity if partners have different tax situations.
Partnership law includes default rules about decision-making, profit-sharing, and liability, but you should have a formal partnership agreement that addresses these issues explicitly.
Limited Partnership Benefits
Limited partnerships are popular for real estate investments where some investors want to be passive.
General partners manage the property, make decisions, and bear liability. Limited partners invest capital but don’t participate in management.
Limited partners’ liability is limited to their investment, provided they don’t participate in management. If they start making management decisions, they risk losing limited liability protection.
This structure works well for property syndications where one or two principals manage the property and multiple investors provide capital.
Tax treatment flows through to partners, and the structure provides clarity about roles and responsibilities.
Corporate Ownership
Owning commercial property through a corporation provides liability protection and flexibility, but adds complexity and cost.
The corporation owns the property. Shareholders own the corporation. By controlling the shares, you control the property.
Corporate ownership provides liability protection. Corporate debts and obligations generally don’t extend to shareholders personally, though shareholders often personally guarantee corporate mortgages.
Corporations file their own tax returns. Rental income is corporate income, taxed at corporate rates. This can provide tax deferral if you don’t need all the income personally.
Corporations allow for different share classes with different rights. Common shares might have control. Preferred shares might have fixed income rights. This flexibility helps with estate planning and succession.
The downsides are complexity and cost. Corporate tax returns are more expensive than personal returns. Corporations require formal governance including resolutions and corporate minute books.
Holding Companies and Operating Companies
Sophisticated structures might use a holding company to own shares in an operating company that owns property.
This adds a layer of liability protection and provides flexibility for estate planning and reorganizations.
Holding company structures are complex and expensive to set up and maintain. They make sense for larger portfolios or when asset protection and estate planning are priorities.
For a single commercial property owned by two partners, a holding company structure is probably overkill.
Trust Ownership
Property can be held in trust, with a trustee owning legal title and beneficiaries having beneficial interests.
Trusts provide flexibility for estate planning and income splitting, but they’re complex and have become more complicated under recent tax rules.
The 21-year deemed disposition rule means trusts face tax consequences every 21 years. New trust reporting requirements add administrative burden.
Trusts still have their place in sophisticated estate and tax planning, but they’re not the default choice for simple commercial property co-ownership.
Tax Implications of Different Structures
The ownership structure affects how income is taxed and how capital gains are treated.
Joint tenancy and tenants in common: Income and capital gains are taxed on each owner’s personal tax return based on their ownership percentage.
Partnerships: Income and losses flow through to partners’ personal returns. Partners can usually deduct their share of rental losses against other income.
Corporations: Income is taxed at corporate rates. Shareholders pay personal tax only on dividends or salary they receive from the corporation.
Trusts: Income can be taxed in the trust or flowed out to beneficiaries, depending on the trust terms and trustee decisions.
Work with a tax accountant to model different structures and understand which provides the best tax outcome for your situation.
Financing Considerations
Lenders care about ownership structure because it affects their security and their recourse if things go wrong.
Most commercial lenders are comfortable with all these structures. They’ll lend to individuals as tenants in common, to partnerships, or to corporations.
But lenders almost always require personal guarantees from the beneficial owners regardless of structure. Owning through a corporation doesn’t eliminate your personal liability to the lender.
Some government lending programs have specific requirements about ownership structure. Farm Credit Canada, for example, has rules about who can borrow and in what structure.
Discuss ownership structure with your lender before finalizing it. Ensure your chosen structure is acceptable and won’t create financing problems.
What Happens When Someone Wants Out
One of the most important considerations is what happens when a co-owner wants to sell their interest. Without clear rules, this creates conflict.
Common approaches include:
Right of first refusal: The selling owner must offer their interest to other owners before selling to a third party.
Shotgun clause: One owner can offer to buy out the others at a specified price. The others must either sell at that price or buy out the offering owner at the same price.
Forced buyout provisions: Other owners can force a buyout in certain circumstances, like if one owner breaches the agreement.
Buy-sell agreements funded by life insurance: If an owner dies, life insurance funds a buyout of their interest.
Define these mechanisms in your co-ownership or shareholders agreement from the beginning, not when someone wants out and emotions are high.
Valuation Issues
Buyout provisions require determining the property’s value. How do you value the property when triggering a buyout?
Options include:
Mutual agreement: The parties agree on fair value, though this often doesn’t work when relationships have broken down.
Independent appraisal: A qualified appraiser values the property, with the cost shared.
Formula-based valuation: A formula like a multiple of net operating income determines value.
Shotgun provisions where one party names a price and the other can buy or sell at that price.
Address valuation methodology in your agreement so you’re not fighting about this when tensions are already high.
Decision-Making Authority
How are decisions made when there are multiple owners? Your agreement should be explicit:
Routine decisions like approving small expenses or ordinary maintenance might be delegated to one partner or require simple majority.
Major decisions like refinancing, major renovations, or selling might require unanimous consent.
Some decisions might require a supermajority, like 75% approval.
Deadlock provisions address what happens if owners can’t agree. Mediation? Arbitration? Forced sale?
Clear decision-making rules prevent every decision from becoming a negotiation.
Contribution and Distribution
How do co-owners contribute to expenses and share in income? Usually this is based on ownership percentage, but not always.
Some structures have some owners contribute more capital upfront in exchange for larger ownership stakes. Others have all owners contribute equally regardless of other assets or income.
Income distribution can match ownership percentages, or agreements might provide for disproportionate distributions in certain circumstances.
Address both contributions and distributions explicitly. Don’t assume “fair” or “proportional” means the same thing to everyone.
Family Ownership Considerations
When family members co-own commercial property, different considerations apply than with unrelated business partners.
Family relationships might make formal agreements seem unnecessary, but they’re actually more important. Family disputes are more painful and harder to resolve than business disputes.
Estate planning becomes critical. If one family member dies, how does their ownership interest pass? To their spouse? Children? Back to other family members?
Family ownership often involves different generations with different goals. Parents might want income while children want growth. The ownership structure needs to accommodate these different objectives.
Adding or Removing Owners
Your agreement should address how new owners can be added or existing owners removed.
Can owners bring in new partners without others’ consent? Usually not, but spell this out.
What happens if an owner wants to sell to a family member? Does the right of first refusal still apply?
Can owners be forced out for cause, like breach of the agreement or failure to contribute their share of expenses?
Anticipating these situations and defining the rules prevents disputes later.
Transition Planning
Think about the long-term evolution of ownership. Will the structure work five years from now? Ten years? Twenty?
If partners are different ages, the older partner might want to start withdrawing equity while the younger builds ownership.
If it’s a family property, will it pass to the next generation? How will that transition work?
Build flexibility into your structure to accommodate changing circumstances over time.
Professional Advice Is Essential
Choosing the right ownership structure and documenting it properly requires professional help from both lawyers and accountants.
A lawyer will prepare the ownership agreement, whether it’s a co-ownership agreement, partnership agreement, shareholders agreement, or trust agreement.
An accountant will model the tax implications of different structures and advise on the most tax-efficient approach.
These professionals should work together to create a structure that achieves your legal, tax, and business goals.
The Cost of Getting It Right
Yes, professional help costs money. A comprehensive shareholders agreement or partnership agreement might cost $3,000 to $10,000 or more depending on complexity.
But consider the alternative. Co-owners without proper agreements end up in costly disputes. They can’t make decisions efficiently. Buyouts become battles. Estates get tangled up for years.
The cost of proper legal and tax advice upfront is a tiny fraction of the cost of problems later.
Common Mistakes to Avoid
Don’t make these common mistakes:
Assuming default legal rules will work for your situation without checking what those rules actually are.
Using a simple ownership structure without an agreement because the relationship is good now. Relationships change.
Copying another property’s structure without understanding whether it fits your needs.
Choosing a structure based only on tax without considering liability, governance, and succession.
Failing to document the agreement in writing because you trust your partners.
Every one of these mistakes creates expensive problems eventually.
Making Your Choice
Choose an ownership structure that:
Provides appropriate liability protection for your risk tolerance.
Achieves tax efficiency for your situation.
Creates clear decision-making authority and dispute resolution procedures.
Accommodates all owners’ goals and circumstances.
Includes clear exit mechanisms for when someone wants or needs to leave.
There’s no single right answer. The best structure depends on who the co-owners are, what their goals are, and what they’re trying to achieve.
At Creek Road Financial Inc., we finance commercial and agricultural properties owned in all these different structures. We understand the legal and practical implications of each.
We can help you think through how ownership structure affects financing, and we work with your lawyer and accountant to ensure the structure supports your goals.
Contact Creek Road Financial Inc. today to discuss financing for your commercial property purchase. Whether you’re buying alone or with partners, we’ll help you structure both the ownership and the financing for long-term success.