Entity Structure- 2nd Real Estate Brokerage Company

6 Replies

What do you think is the best way to structure a second real estate brokerage company? 


Background: I have a Florida real estate brokerage company (an LLC that has elected to be taxed as an S-corp) that is 100% commercial real estate focused. We do quite well in our market. I pay myself an annual salary and have 2-3 hourly employees along with a growing group of agents (ICs). I am affiliated with a top ten commercial real estate company and run an office in tertiary Florida market. The franchisor does not want residential real estate transaction run through the brand and I completely agree with that philosophy.

However, I personally invest in residential rental properties (over 50 units) and know I can easily grow a separate company that will handle residential real estate brokerage transactions and residential management assignments. 

Due to Florida Real Estate rules, I can't have two DBA attached to the LLC that is the current brokerage corporation (the commercial firm). An entirely separate entity will be needed and brokerage corporation will be needed.

To start the residential firm will be a single member LLC but may turn into a partnership in the near future. What do you think is the best way to structure this? Create a new, separate single member LLC to handle the residential transactions? Or create a new LLC that is owned by the existing LLC that is already an FL real estate corporation that has made the S-Corp election? Any other ideas?

@Kevin Wattenbarger Glad business is going well! I would recommend a separate LLC (not an attorney though) as this will give you added flexibility (you mentioned potential partnership) and less complications with the unrelated S Corp (commercial).

Are your personal 50 units involved in this S-Corp or is that a completely separate situation? 

One thing to consider, the new rate (35% down to 21%) on a C-Corp. It can make it attractive for a brokerage if your income is in the top bracket. There is definitely double taxation when you pull money out (unlike pass-through) but I imagine you're wanting to keep the money (marketing budget, new offices, etc.) reinvested in the business, thus "avoiding" the double taxation. It may be something to consider for the new entity but would require a deeper dive into the details and discussions with your attorney/CPA. I'd be curious if anyone else has input on the new C-Corp rate. 

Let me know if I need to make anything more clear. 

Josh Lewer thank you for the reply and input. That’s the direction I was heading (new single member LLC to start) but trying to think this through make it as simple as process. Do you see any issues with distributing and profit made by the residential firm (new LLC) back into the existing commercial LLC? With payroll and the employees already in place in that company I think it would be easier for bookkeeping and managment.

No, the rental properties are not owned by the S-Corp. The S Corp LLC does not have any assets other than cash and business equipment. Most of the rentals are help by SM LLC or partnership LLC with a few of my first properties still in my personal name (we’re purchased as primary residence and later converted to rentals). Transferring these out of my personal name is on my to do list.

I had not considered a C-Corp for the brokerage but would be interested to hear what others are doing too.

@Kevin Wattenbarger not a problem. Your situation would rule out a C-Corp since you want the flexibility to move funds in and out of these entities. 

The LLC will be your best option (with a new bank account) as there is only one layer of taxation on the profits. Any funds going out of new LLC (residential) will be a distribution and picked up as a contribution in the old (commercial) S-Corp assuming you're the sole shareholder of the S-Corp. The rules can get more complex with multiple shareholders.

@Kevin Wattenbarger

Usually, the entity structuring is simple for most of the beginners. Yours is not simple. And I would suggest getting an attorney and CPA. 
I agree with @Account Closed .I think creating separate SMLLC  that is owned by you rather than S-corp to hold the properties that you already own is a better idea. There are various reasons.

You cant just transfer assets to the S-corp owned LLC without owing taxes. Your S corp would have to own a property to contribute it to its 100% LLC to qualify as SMLLC of S-corp.

For tax free treatment, If S-corp creates 100% owned LLC, and if you want to contribute asset to that LLC without tax implication, you and S-corp would be a partner in that LLC, and it would create a partnership, not a Single member LLC. That would just complicate things without creating any benefits. You could just create your 100% owned SMLLC and do the same thing, tax-free transfer.

Ignoring what I said, even if you do all the required sale/contribution to put all the asset in the S-corp 100% owned LLC. The rents/activities passing through the LLC to S-corp would be the rental income on the S-corp books, that would not align with your goal of separating two businesses.

Also, even if you create separate SMLLC and distribute all the profit to your Scorp, the bookkeeping needs to happen at LLC level, not S-corp. What I meant was, even if dont reinvest the profit in the S-corp, you still need to keep books for LLC.

@Ashish Acharya thank you for your comments as well. I definitely will definitely discuss with my advisors before the new entity for the residential brokerage & management firm are finalized but these comments help steer the direction and my questioning. Assuming the new entity for the residential brokerage firm starts as a SMLLC I will have a separate bank account and be keeping a new set of books for the residential firm. The entities that hold title to the rental properties are all either SMLLC or partnership LLCs and plan to continue with those types as new rentals are added. I don’t see a reason where I would want an s-Corp to hold title to rental properties for me personally. Are there any common circumstances when an s-Corp or c-Corp should hold title to investment properties for small RE investors or partnerships?

Originally posted by @Kevin Wattenbarger :

Ashish Acharya thank you for your comments as well. I definitely will definitely discuss with my advisors before the new entity for the residential brokerage & management firm are finalized but these comments help steer the direction and my questioning. Assuming the new entity for the residential brokerage firm starts as a SMLLC I will have a separate bank account and be keeping a new set of books for the residential firm. The entities that hold title to the rental properties are all either SMLLC or partnership LLCs and plan to continue with those types as new rentals are added. I don’t see a reason where I would want an s-Corp to hold title to rental properties for me personally. Are there any common circumstances when an s-Corp or c-Corp should hold title to investment properties for small RE investors or partnerships?

 Very rarely rentals will be in S-corp or C-corps.  You are heading in the right direction. Your advisors will be able to confirm more once they know more detail about your goals and if any specific situation. Good Luck.