I do not know how to break up my business into smaller entities.

Tax, SDIRAs & Cost Segregation
10yFollow

I do not know how to break up my business into smaller entities.

Brandon Ingegneri
Rental Property Investor · Providence, RI · Member since 2015 · 1k+ posts · 594 votes

My partner and I currently own what essentially amounts to a number of rental properties, a construction company, and a property management company all under 1 LLC. What we are looking to do is have several LLC's established to separate everything and minimize exposure. The first would be a holding company for our long term rentals. The second would be a construction company that would service our rentals and our other customers. We are currently in the midst of establishing our own real estate brokerage that will be the third entity.

So, here are the questions that I have.  Should the property management portion of the business fall under the construction entity, or the realty entity?  I do not want to create a completely separate llc just for the property management.  I would like it to fall under one of the other entities.  Additionally, should there be a parent corporation that each of the smaller businesses falls under, or should they all remain independent?

For example... 

X corp which owns:  x holdings, x realty, x construction

or just

x holdings, x realty, x construction with no parent company?

I look forward to everyone's input and opinion on this from legal, tax, and insurance standpoints, etc.  

0Reply
38 views

Most Popular Reply

Brandon Hall
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
10y

@Brandon Ingegneri property management, in my opinion, should fall under the brokerage if you want it to be a sub entity. I say this for a couple of reasons: (1) they are similar businesses and many brokers offer a PM arm anyway; (2) from a marketing perspective, it would be easier to pitch a PM firm held by a brokerage than a construction company; (3) I wouldn't want my PM firm to subject my construction company, and all my investor's money, to unnecessary risk.

You should have a parent company as it provides one more later between your personal assets and the business. You should consider an LLC as the parent company so that you always have maximum flexibility to distribute profits to partners. Each partner should consider creating a personal entity and then using that enrich to invest in the parent LLC. This will allow each partner to utilize a strategy unique to his/her own situation without impacting the business or other partners.

Because m the parent is an LLC, it does not have to distribute profits on a percentage of ownership basis like Corps do (because Corps have shares and dividends are issued per share).

Example

Partner 1 sets up S-Corp and invests is Parent LLC (50% stake). Partner 2 sets up C-Corp and invests in Parent LLC (50% stake). Parent LLC invests in three subs: Rental LLC, Constr LLC and Broker LLC. Broker LLC invests in PM LLC.

3Reply
See this reply in the discussion

14 Replies

Jump to latestLatest
  • Al Wilson
    Investor · Daphne, AL · Member since 2014 · 1k+ posts · 242 votes
    10y
    You would be better served to get legal advice from your lawyer and tax advice from your CPA, as opposed to on an Internet forum. Good luck.
    0Reply
  • Jason BottPro Member
    Insurance Agent · Nationwide · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    @Brandon Ingegneri, from strictly an insurance perspective, it is much easier for me to find competitive insurance options for a landlord who manages for himself and others.   It would be close to imposible to find a competative insurance policy for a contractor who also manages rental properties for others.

    0Reply
  • Brandon Ingegneri
    OP
    Rental Property Investor · Providence, RI · Member since 2015 · 1k+ posts · 594 votes
    10y

    @Al Wilson I have spoken to my CPA, Insurance agent, and attorney and all three seem to be of differing opinions. That is why I resorted to the site. 

    0Reply
  • Brandon Ingegneri
    OP
    Rental Property Investor · Providence, RI · Member since 2015 · 1k+ posts · 594 votes
    10y

    @Jason Bott, my agent is able to find us G/L coverage as property managers as well as general contractors insurance but it is only in the surplus lines. The ability to secure coverage insurance wise may determine how we need to go about this. 

    0Reply
  • Brandon Hall
    CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
    10y

    @Brandon Ingegneri property management, in my opinion, should fall under the brokerage if you want it to be a sub entity. I say this for a couple of reasons: (1) they are similar businesses and many brokers offer a PM arm anyway; (2) from a marketing perspective, it would be easier to pitch a PM firm held by a brokerage than a construction company; (3) I wouldn't want my PM firm to subject my construction company, and all my investor's money, to unnecessary risk.

    You should have a parent company as it provides one more later between your personal assets and the business. You should consider an LLC as the parent company so that you always have maximum flexibility to distribute profits to partners. Each partner should consider creating a personal entity and then using that enrich to invest in the parent LLC. This will allow each partner to utilize a strategy unique to his/her own situation without impacting the business or other partners.

    Because m the parent is an LLC, it does not have to distribute profits on a percentage of ownership basis like Corps do (because Corps have shares and dividends are issued per share).

    Example

    Partner 1 sets up S-Corp and invests is Parent LLC (50% stake). Partner 2 sets up C-Corp and invests in Parent LLC (50% stake). Parent LLC invests in three subs: Rental LLC, Constr LLC and Broker LLC. Broker LLC invests in PM LLC.

    3Reply
  • Brandon Ingegneri
    OP
    Rental Property Investor · Providence, RI · Member since 2015 · 1k+ posts · 594 votes
    10y

    This  is exactly what I was looking for. Thank you. 

    0Reply
  • Matthew Kreitzer
    Attorney · Winchester, VA · Member since 2015 · 726 posts · 387 votes
    10y
    Originally posted by @Brandon Ingegneri:

    @Al Wilson I have spoken to my CPA, Insurance agent, and attorney and all three seem to be of differing opinions. That is why I resorted to the site. 

     That is often due to the fact that each of these professionals are looking at your situation from different lenses. You've received excellent advice on the tax ramifications in this thread from a fantastic CPA. However, there are legal issues when dealing with series LLCs. Many states do not recognize them, and they often offer less asset protection or more potential for piercing. Insurance agents, of course, want to sell you insurance. I think it is important to weigh the risk factors from a legal perspective AND the tax ramifications from a financial perspective before making a decision.


    Are the overhead benefits from a tax perspective outweighing the potential loss from a lawsuit?

    1Reply
  • Brandon Ingegneri
    OP
    Rental Property Investor · Providence, RI · Member since 2015 · 1k+ posts · 594 votes
    10y

    Thanks @Matthew Kreitzer. In RI, an LLC offers as much protection as your level of diligence with keeping it as a separate entity. If you are compliant with you minutes, filings, and no funds are transferred back and forth or commingle, you have a barrier of protection in the eyes of the court. Obviously I am sure this varies a bit from state to state as far as enforcement, but overall, Rhode Island does offer protection to the LLC if it is operated accordingly and pays attention to the smaller details associated with maintaining good standing and organization. The more readily your daily operations reflect each entity is insulated from another, the better off you are.

    Thank you though. I do have a feeling that this will become more of a happy medium between my attorney and accountant then I will have to shop it to my insurance agent.  

    0Reply
  • Jason BottPro Member
    Insurance Agent · Nationwide · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    @Brandon Ingegneri Not surprising.  The reason you are paying a higher rate in the Surplus Lines market is because of the current entity structure.  Your businesses are "Standard Market" insurance risks and should not be in the Surplus lines market. 

    Restructuring your entities could cut your insurance costs by up to 50% while improving coverage substantially. 

    0Reply
  • Anthony ThompsonPro Member
    Buy and Hold Investor · Cranston, RI · Member since 2013 · 1k+ posts · 1k+ votes
    10y

    Brandon, if it were me I would keep the rentals separate from the other entities because rental income/expense is treated differently for tax purposes (schedule E).

    The other businesses are all "earned income" type of businesses so in theory for tax purposes could be combined, but I would keep construction as its own entity because it's really its own kind of business with its own kind of risks.

    I would probably put the property management under the real estate brokerage, both for the sake of simplicity and also the fact that if you want to manage properties for others (which might technically include you due to entity structure) you need a real estate license in RI anyway. Also as others mentioned this is a fairly common setup and even a common insurance rider for brokerages.

    Again if it were me I would probably forego a parent company for all of this simply to keep things simple. When you overcomplicate things it makes it a lot easier to miss a detail that could potentially open an entity up to being set aside.

    While I understand the "multiple layer" argument, the extra complexity (not to mention extra cost, if you care about that sort of thing) means extra risk of doing something incorrectly (missing an annual meeting, writing a check from the wrong account, etc.), and if you maintain the main entities correctly anyway I think that (and a good insurance policy) is the real line of defense.

    "The devil is in the details", and it seems like there are more than enough details in real estate already. I've been to many "asset protection" seminars over the years and I agree that owning/operating in a sole proprietorship or general partnership is insane, and some entity structuring is certainly necessary - to a point. But I also carry around 8-10 checkbooks at any one time and at this point I've come to appreciate the power of simplicity as well.

    0Reply
  • Logan AllecBusiness Member
    Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
    10y

    @Matthew Kreitzer, I don't think anyone was suggesting a series LLC.

    Clarita CPA Group516 Reviews
    WebsiteView Page
    0Reply
  • Brandon Hall
    CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
    10y

    @Anthony Thompson the parent LLC is a means of consolidation for the two partners. In theory, it greatly simplifies future entity structuring and, if using my method of each partner using their personal entity to invest in the parent, allows for maximum flexibility.

    For instance, the construction and brokerage entities may be SMLLCs owned by the parent. All profits flow to the parent and are reported on a single tax return. If not structured in this manner, each and every entity must produce a tax return (assuming they are partnerships).

    Additionally when structuring future entities with investors, the Parent LLC can invest in a new sub LLC. For instance, Parent LLC takes a 50% stake in a new entity, rather than each partner taking a 25% stake and the new investor taking a 50% stake. This keeps the new investors from having access (up or down the liability chain) to other LLCs the parent already owns. It also simplifies the reporting, accounting, and structuring of the deal.

    0Reply
  • Matthew Kreitzer
    Attorney · Winchester, VA · Member since 2015 · 726 posts · 387 votes
    10y
    Originally posted by @Logan Allec:

    @Matthew Kreitzer, I don't think anyone was suggesting a series LLC.

    That would depend on how you define a "series LLC", as it is not a traditional common law entity. It is a fictitious name of a type of entity in which you have multiple subsidiaries of a parent LLC (in the most general of senses). Many attorneys, such as myself, lump any variation of a hub and spoke model of LLC planning into the term of "series LLC", because they receive similar treatment by local courts. Whatever your local attorneys view the term as, the fact remains; using a hub and spoke model of business management opens the proprietor up to additional liabilities and concerns related to record keeping, banking, and other issues. If you are considering a hub and spoke model of business management, consult your local attorneys to determine what risks, if any, you run.

    0Reply
  • Aaron Vergason
    Rental Property Investor · Erin, NY · Member since 2016 · 130 posts · 32 votes
    9y

    Maybe check out Corporate Direct.  They specialize in entity creation for investors.  Their fees seem quite reasonable.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free