Business property can be defined as all items of personal property, as well as fixtures, that are owned, controlled, managed, and/or possessed by a business. Business property is especially important to those businesses associated with the production and distribution of products.
Depending on the type of business formation as well as state laws, business property may be categorized differently. Additionally, some forms of personal property can be converted to business property. An example of this would be if an individual donates their personal property to be used by the business.
While the term “business property” generally refers to non-real estate property (personal property), it can sometimes include commercial real estate. The legal definition of personal property would be anything besides land that may be subject to ownership. As such, the defining characteristic of personal property is that it is movable. This is unlike real property or real estate, which is defined by its being unmovable.
There are two basic types of personal property, Tangible property is personal property that can be physically handled. Examples include clothes, jewelry, and furniture. Intangible personal property is property that cannot be physically handled. Examples include stocks, trust fund accounts, and the like.
What Are Some Of The Most Common Types Of Business Property?
It can be difficult to define exactly what constitutes business property, as the definition of the term itself is broad. Some of the most common types of business property may include, but not be limited to:
- Production equipment and machinery, such as factory equipment and cash registers;
- Company vehicles;
- Signs or displays;
- Installed fixtures, such as pipes, hoses, and electric gear;
- Maintenance equipment that is owned by the company; and
- Company furniture, such as desks.
The defining characteristic of business property is whether or not the business owns and controls the property. It is also mainly a question of whether or not the property is being used for the overall purposes and goals of the company.
Real property, also referred to as real estate, is property that includes land, buildings, and anything that is affixed to the land. In terms of a business, real property would include:
- Other buildings that are owned by the business;
- Whatever lies beneath the surface of the land, such as minerals, natural gas, and oil;
- Rights to the use of property; and
- Leasehold improvements, which are improvements made to the property, as these improvements cannot be removed.
Listed property refers to a specific type of personal property belonging to a business that experiences increased scrutiny by the IRS. This type of property may be used for either business or personal reasons; as such, the IRS more carefully monitors deductions for payments for this type of property, as well as for deductions for the use of this type of property. An example of listed property would be business vehicles, computers, and other electronics.
How Is Business Property Sold?
Due to the fact that the sale of business property affects both income taxes and real estate taxes, the sale of any business property must be recorded and included on your business tax return.
IRS Form 4797–Sale of Business Property is used to record the following information:
- The sale or trade of property that was used in a business for at least one year;
- Involuntary conversion of property that has been held for over one year;
- Any ordinary gains and losses on business property;
- Gain from the sale of specific types of business property; and
- Recapture of property as detailed under Sections 179 and 280F(b)(2), when business use of the property drops to 50% or less.
Form 4797, as well as the Instructions to Form 4797, can be found on the IRS website.
What Are Some Common Examples Of Business Property Disputes?
It is common for business property to be a source of legal disputes, especially during the process of buying and selling a business. Some of the most common examples of business property disputes can include:
- Damage or losses associated with the business property;
- Liability for injuries caused by the business property;
- Distribution of the property upon the closing of the business;
- Business property tax claims; and
- Commercial property insurance disputes.
Generally speaking, most business property disputes result in a damages award. This award is intended to reimburse the plaintiff for their losses resulting from the dispute. In the event of a debt proceeding, business property can sometimes be subject to a lien, meaning that the property may be seized and sold in order to compensate for the business debt.
What Else Should I Know About Buying Or Selling A Business?
Because business property is so closely associated with buying or selling an existing business, it is helpful to discuss some of the information regarding the topic in general.
Some of the suggested steps that a party should take when preparing to sell a business include:
- Updating the business’s financial records, or their personal records if the business is structured as a partnership;
- Hiring a real estate agent to help list and sell their business at a competitive rate;
- Hiring an appraiser to determine the exact value of their business;
- Consulting with a business attorney to ensure that everything is in order when finalizing the sale of the business; and/or
- Gathering any documentation that is important to the sale. This would most likely include the lease or title to the business property, business financial statements, agreements with vendors, and various other paperwork.
A sales agreement, also referred to as a commercial or business contract, should contain the following items:
- The total sale price of the business, along with when payment is due and the manner in which it is being paid;
- A detailed description of the services and/or goods that are being sold with the business;
- A detailed description of any business property that is being transferred to the new owners;
- Any warranties that are being guaranteed by the seller or buyer, if applicable;
- A provision which states that all changes must be made in writing;
- The date for when the entire company will transfer over to the new business owners; and/or
- Terms associated with how the business will be operated by the purchaser, or what the seller intends to do as part of their exit strategy.
Examples of common legal issues and/or disputes associated with selling a business include:
- How the seller intends to eliminate all of a business’s debts and liabilities before the business is sold;
- Alerting the landlord to the transfer of ownership;
- Whether there will be issues associated with maintaining the business’s customer base, and/or employees once it is sold;
- Whether the seller would like to hand over the rights to the business’s intellectual property, or if they can hold on to it and require the buyer to create and register for new IP rights;
- Whether all of the business property being sold along with the business is in good condition; and
- Whether the buyer is aware of all business debts and liabilities that could potentially put the seller at risk if the buyer discovers the information after the sale.
Do I Need An Attorney For Issues Associated With Business Property?
If you have any questions regarding business property, or are experiencing issues especially when buying or selling an existing business and its property, you will need to consult with an experienced and local commercial lawyer.
An attorney can provide you with relevant information in terms of your state’s specific laws regarding the matter, and can also help you address any issues that have presented themselves. Further, a business attorney can help you manage your business property legally, and will also be able to represent you in court, as needed.