Self-assessment Step 3: Place of Operation

This is the third in a series of articles that examines your operations to determine whether your business is healthy and whether you are doing everything you can to maximize your profit, run efficiently and minimize risk. The first article, which appeared in the October 2010 issue, page 18, examined the legal structure of your business. The second article, which appeared in January, page 20, reviewed business agreements. This month, I examine where you conduct your business.

Many contractors start operations out of their homes and, as they grow, move to leased spaces. Some contractors purchase buildings for their operations. What’s best for you? Following are some of the pros and cons for each type of space.

Home-based Operation

Operating out of your home can have benefits and detriments. Obviously, costs are lower, and it is very convenient to roll out of bed and immediately be at work. The downside is the disruption to your family and neighbor complaints when trucks line up outside your home for morning meetings. The following are items you should review if you have or are considering a home-based operation:

  1. Do you have a permit to operate a business in your neighborhood? Check with your local jurisdiction to see whether it is necessary.
  2. Are your tax write-offs for business expenses in jeopardy? If you are disorganized, you might have your construction operation spread throughout the house—documents on the dining-room table, tools in the garage and files in the basement. To write off some of your home expenses as business costs, you must operate out of a totally segregated area of the home. In other words, you can’t use the dining room as your office and clear the table for dinner parties. Talk to your accountant about the specific rules and correct calculations.
  3. Are you losing business because people think operating out of your home is less professional? The additional clients you attain by having an outside office might justify the additional cost.

Leased Space

If you are leasing space for your operations, the following are important factors to review:

  1. Does your leased space allow you to expand as your business grows? Having an option to lease more space may be an advantage.
  2. If your lease expires in a few years or sooner, you should investigate whether you want to remain in the space. If you do, start discussions with your landlord now, not at the end of the lease when you will be desperate. If you don’t want to stay in the space, start looking now. You might get a great deal if the market is soft. You always can sublet space for the short term.
  3. If your lease terms are not favorable, try to negotiate a lower rent or better terms in exchange for extending the length of the lease. Landlords would rather have lower rent for a longer period than face the prospect of a vacant building.
  4. If you are paying a share of the common-area maintenance, review the calculations to ensure you are not being overcharged.
  5. Enter a lease in the name of your business (if incorporated) instead of your personal name. If your business fails, this is one way to prevent personal liability for the remaining lease-term payments as long as you haven’t provided a personal guarantee.

Buying a Building

Does it make sense for you to buy a place for your operations? Although that can be a scary thought, it might be extremely beneficial in the long run.

  1. You can control your payments.
  2. You can make improvements that will increase the value for you, not your landlord.
  3. You can have rental income from leasing the space when you retire.
  4. Your business will have greater value if you sell it because you can offer a long-term lease with the business.
  5. The tax benefits may significantly offset or at least reduce the purchase costs.
  6. You could lease part of the space to your subcontractors, thus keeping their loyalty.

Run the numbers with your accountant to see whether buying a building makes sense. In a down real-estate market, it certainly is worth exploring.