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Best Legal Structure for My Assisted Living Facility

By July 23, 2023October 20th, 2023No Comments

A reader recently asked me, “What is the best legal structure for my assisted living facility?”.

That’s a great question.

It’s also a perfect one to ask your attorney who is qualified to answer it completely.

But without giving legal advice (talk to your attorney), I’ll attempt an answer from a business (not legal) point of view based on my experiences as an advisor and investor in assisted living facilities. (By the way, you should also talk with your CPA and other advisors about the tax and other implications of your legal structure.)

The reader who asked the question was planning to be an owner-operator. They were in the process of purchasing a small assisted living facility and planned to work in it full-time. This ownership scenario is common, but there are many others.

Some scenarios and ownership roles include:

  • Owner-operator: Like our reader above, this property owner also leads the operations and works full-time in their facility (or facilities).
  • Active owner: An owner of the property and the operations who works less than full-time (possibly much less) in the facility and hires a full-time administrator.
  • Passive owner: An owner of the property that is wholly removed from the day-to-day operations. They may not even own the operations. This owner either leases the property to a tenant operator or engages a third-party manager (see below).
  • Partner: Some owners are partners (equal, majority, or minority) in the property and operations ownership, with the partnership being active or passive owners.
  • Tenant operator: An owner of the operations that leases and operates a property owned by another party.
  • Third-party manager: A non-owner role but an important one in the legal structure of your business.

The legal structure and documents depend on the ownership scenario and your role with your facility. It may be quite complex, or it may be simple.

This post will cover the reader’s simple, straightforward scenario as an owner-operator.

Many owners are interested in two issues when setting up their legal structure: legal liability and tax planning. While I won’t discuss how the structure below addresses those issues (talk to your professionals), I’ll describe a common legal structure for assisted living facilities.

Ownership of an assisted living facility is often viewed as two separate assets: the real estate and the business operations. Each asset goes into a separate ownership entity, usually a limited liability company (LLC). However, sometimes, an S corporation may have advantages for your operating entity – check with your attorney and CPA about your situation.

This arrangement sometimes refers to the two entities as the PropCo and the OpCo, for the property ownership company and the operations company.

So let’s say you now have two LLCs, one owning the real estate and the other owning the operations. There is still at least one thing missing. A lease.

While you may be both landlord and tenant, a lease is a way to document the relationship between the entities. Your counsel will be able to explain why this step is helpful or even necessary to have the full benefits of this arrangement.

Here’s the answer to my reader: Your attorney, CPA, and other advisors will know what legal structure is best for your situation. You may suggest that a PropCo LLC and an OpCo LLC with a lease between the two entities may be right for you. But follow their advice!

What question can I answer for you? Let me know in a comment below or click here.

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