Does anyone else run two companies a Rental and a Construction? The type I am referencing is a Rental company that rents your machines to your Construction company, not necessarily renting to anyone else. There are several large companies I know of that run this type of arrangement. I can see the benefits if you are running 5 or more pieces of equipment on a regular basis. The const co pays rental to the rental co for hours, days, etc used. The rental co owns the equip and maintenance can be described however it fits your business model. Some advantages I see - 1. Being able to protect your biggest assets in the event of a lawsuit arising from a constructed product. (not that I plan on doing shoddy work, but lawsuits have brought down a few good contractors before) The construction company can indemnify the rental company. 2. For tax purposes there may be a savings since the rental is an expense to the const co - no depreciation schedules and taxes. Now the rental co would have to deal with depreciation, etc. If one company was going to have a good year, say the const co, the rental rate could increase and vice/versa. I would get an accountant and/or att. to check into the rules on that. 3. You could have a higher utilization rate of your equipment if you decided to rent the equipment to other companies. Of course the old term "Nothing party's like a rental" comes to mind. 4. HE is the biggest asset in an excavation business, so managing it as a stand alone business would be more precise with a separate company. Problems: 1. possibility of redundant taxes - like corp franchise tax 2. paying double for insurance on the same equipment 3. more accounting fees for 2 companies 4. extra bookkeeping involved with two companies, although the rental co wouldn't need to have any employees so accounting would be easier I like the idea of having potentially two profit centers. The jobs still pay the same but you could precisely account for what your equipment is truly costing you and what it is earning. The rental co could grow to start renting small tools and equipment and become another earnings stream, of course that has it's own headaches. Has anyone else used or is using this type of business structure?
I'm not doing that, but, have been strongly considering it. Have one company year end June 30th, and the other year end December 31st. Shuffle income from one to the other. Doesn't prevent taxes, but could defer them some. Like I've heard, a tax deferred seven years is a tax not paid. I run a few cranes, and I have trouble with liability insurance if I rent them out. VERY expensive. Might could save on insurance if the rental company owned the cranes. Am in the process of checking all that out.
I don't have this sort of structure either. Good point about staggering the year ends. If the const co had a good year rental rates could go up the 2nd 1/2 of it's year to send profit over to the rental co and vice/versa. You could structure this many ways. I also like the idea of separating your assets (equipment) from liability (performed work) in the form of two different companies. If you wanted to retire from the rat race (construction) you would have your assets (HE) totally separate. Our local Cat dealer has something similar, although it is real estate based. The Family owns all the real estate in a separate company from the Dealership. The Dealership pays them rent for all the locations. If the Dealership has a good year, the rents go up. Any improvements to the facilities are charged back to the Dealership, expense it to your dealership and gain the long term rewards of an improved property.
Never heard of renting equipment to yourself, but i have heard of dealerships renting their real estate through. My buddy's family does this with their car dealerships. There is an added bonus to that system. If somebody makes a complaint about the property, you just point them in direction of the ownership company, and say "good luck finding them", under your breath of course. Anyway, back to the original question. You could hire mechanics/oilers under the rental company and you might be able to offer services to companies. The success of that idea would pivot on whether those companies knew you owned the rental business too or cared.
CM I see where you are coming from. I know that when Mann Bros. was still in business (they had a huge dirt spread, water+sewer and quarry's with lots of crushers) They ran a business structure like what you are talking about. They had a rental company, shop and then the construction company. The rental company would rent to the construction company, then when it broke down the shop would get charged. Sounds really confusing to me. I think that it could have lots of benefits if you could keep everything straight.
You shouldn't be faced with double insuring the equipment. But I imagine that you'd have to have more complete insurance if your intent is to "rent it out" if even only to yourself. Book keeping would not really be any more complicated if you already keep good records. I think you'd have to be grossing several million per year before this became a way to save you money. There could be a loophole somewhere that makes this worthwhile. If the rental company ups the rate to reduce the profit on the construction company. Isn't the net income between the two companies the same?
Another advantage of an in-house rental co is change orders. Typically the owner or GC wants equipment, if company owned billed at "Blue book" rates which are down in the toilet or if rented provide actual invoice from the rental company. I don’t know about you guys but I pay a lot less for my rentals due to volume and negotiation then the posted or avg rental rates. My feeling is why is the GC or owner entitled to pay the same rate I get that I earned due to negotiation and managing my business? This is where "in house rental co" comes in handy. Just my 2 cents...............
I'm normally good at grasping business stuff, but i had to read this 2-3 times to get it. From what i got, Being able rent out needed equipment at invoice and make money on both ends would be a huge advantage, especially compared to the scenario where you wind up saving the GC money b/c of your favorable out-of-house rental rates.
i use to work for a decent sized demo co based in cincy, thier buisness structure was set up like this, trucks were owned by O' Trucking. Service trucks were owned by O' service co, Equipment Owned by a seperate, My pay check came from O' servicing (out of 50+ employee only 3 of us got checks from this company) Spreads liability out and protects assets if the preverbial **** was to hit the fan. One persons mess up can bring down a whole organization quickly. The trucks were leased to the other company etc, I believe messer is going to this struture as well Travis
The last company I worked for was structured this way. The benefits of isolating your assets and being able to manage them more efficently are huge. This company was running about 30 job sites at one point and the equipment would be charged to a job site, everything from welders and hand tools to excavators and haul trucks. Really a good system. I've talked to guys that have LLC's and they talk about personally owning the equipment but "leasing" it to the LLC. Anyone legitimatly know how this works? Didn't sound like they were derriving a profit from the company on rentals, just keeping the assets out of the LLC. Not sure if this is legite or shady?
This is common practice in aviation due to the high risk of loosing assets in a law suit. Also say if a truck has a wreck they can come after all the company assets. Be sure to keep the company separate ( do not pay your personal bills with company check) a good lawyer can the knock the walls of a corp down making you liable.
Thanks for the input Wawrecker, that's an aspect I haven't consider as a "+" for this type of structure. Silverddo, I don't see any thing shady about owning the equip personally and leasing back to the company - it's just a different business strategy. To set this up you would need an internal rental agreement and good accounting, although for me I would want to own the equipment in an LLC. Very true Ontrac, it's called "Piercing the Corporate Veil". Every company needs to be aware of this tactic by plaintiff attorneys. If they can successfully prove this in court then you basically loose all the benefits of having a Corporation or LLC in the first place. Basically they try to prove that you were operating your business as an individual proprietor (your example is a big one) instead of a Corp because you blurred the lines financially or in some other fashion. Thanks for the replies!
I have worked with a number of companies that do exactly what you are suggesting or thinking about doing. One of my client's had a Fleet Machine Utilization Rate of 20% (Machine Operating Hours divided by Available Working Hours). Renting equipment to others was one of my recommendations. It may tend to cause some owners to keep better books. IMHO all self-maintaining contractors ARE already in two business. Excavation and Heavy Equipment Maintenance, for example. Four cautions: You must know your true machine cost. This may be why we have seen several large rental companies to declare bankruptcy. Your rental company has to be careful not to "Kill the Golden Goose" with its rental rates. Another client had the opposite problem. They discovered that their Machine and Shop Division was losing over $1,000,000.00 in a year. If you rent to 3rd parties (which you are not suggesting), you need to have a rate structure that is different for different people i.e. A, B, & C, clients. Be cautious about machinery and labor costing based only on what your accounting system shows as your machine or labor cost (you will probably go broke.) See my other posts elsewhere on HEF. More info? Send me a message. Dan