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LLC Strategy - The Overlooked Management Co?
Often when I work with real estate investors to create asset protection strategies, most tend to prefer a simple asset protection structure (something low-cost that does the job essentially). Usually, this would include something like a holding company ("Hold Co"), typically a traditional LLC, which in turn then owns an investment entity, often a traditional or Series LLC, which will be the entity that owns the assets/property invested into (the "Investment Co"). However, I usually recommend adding a third entity to the structure, a so-called management entity ("Management Co"), an entity I think is often overlooked amongst investors.
The purpose of the Management Co is to deal with any third parties such as vendors, contractors, attorneys, banks, etc., and to create privity between the entity that holds the actual assets of Investment Co and Management Co.
Perhaps this will provide some food for thought when discussing your next asset protection strategy with your real estate attorney. Below is a chart of what this simple structure could look like.
Please note that this post is for informational purposes only and is not intended to serve as legal or tax advice. Prudent investors should consult an attorney before creating or forming legal entities.
Wow! This is great information!
I just posted a question asking this, and then I came across your post from 10d ago!
What are the consequences of simplifying the entity formation further by creating the Management Co as a child series of the Investment Entity?
@Adam Burrows the idea here is to create privity between the investment assets and third parties. As such, third parties (lenders, brokers, tenants etc.) should sign contracts with the Management Company and not the Investment Entity to add an extra layer of protection for the Investment Entity against any lawsuits arising from those contracts. For these reasons (and a few more) we typically don't recommend creating a Management Company as a child series of the Investment Entity. Happy to discuss further - feel free to reach out.
Quote from @Carl Stenberg:
@Adam Burrows the idea here is to create privity between the investment assets and third parties. As such, third parties (lenders, brokers, tenants etc.) should sign contracts with the Management Company and not the Investment Entity to add an extra layer of protection for the Investment Entity against any lawsuits arising from those contracts. For these reasons (and a few more) we typically don't recommend creating a Management Company as a child series of the Investment Entity. Happy to discuss further - feel free to reach out.
Sir - i'm in Orange County, NY. I recently became licensed here in NY to be an agent. I'm almost done with PA license also. I figured i needed a "company" to have my commissions written to, instead of me personally. My accountant thought an S-Corp was the best option - something about being able to do more on the "tax" side? My overall goal is to have my real estate commission checks in that company and have the new s-corp company buy units to rent. Does this sound like a decent plan?
Why would the landlord not want to be the managing member/ sole member of the management company and just take its earnings back onto his 1040 directly without passing them through to another shell company?
If the landlord draws a lawsuit while acting under the cover of the management company llc, wouldn't he or she prefer not to have privity with the llc that holds the title to the properties?
Such as in a slip and fall suit, or a broken stair tread lawsuit.
Quote from @Scott Mac:
Why would the landlord not want to be the managing member/ sole member of the management company and just take its earnings back onto his 1040 directly without passing them through to another shell company?
If the landlord draws a lawsuit while acting under the cover of the management company llc, wouldn't he or she prefer not to have privity with the llc that holds the title to the properties?
Such as in a slip and fall suit, or a broken stair tread lawsuit.
i'm not sure if this for me or the guy above me.
Quote from @Pete Wolven:
Quote from @Carl Stenberg:
@Adam Burrows the idea here is to create privity between the investment assets and third parties. As such, third parties (lenders, brokers, tenants etc.) should sign contracts with the Management Company and not the Investment Entity to add an extra layer of protection for the Investment Entity against any lawsuits arising from those contracts. For these reasons (and a few more) we typically don't recommend creating a Management Company as a child series of the Investment Entity. Happy to discuss further - feel free to reach out.
Sir - i'm in Orange County, NY. I recently became licensed here in NY to be an agent. I'm almost done with PA license also. I figured i needed a "company" to have my commissions written to, instead of me personally. My accountant thought an S-Corp was the best option - something about being able to do more on the "tax" side? My overall goal is to have my real estate commission checks in that company and have the new s-corp company buy units to rent. Does this sound like a decent plan?
That sounds like a great plan to me. You will eventually want your nonpassive income to be flown through an S corp so you can lower the amount you pay into self employment tax. That said, there is a break even point to determine that and I do not know your financial situation now. But, assuming this is your main source of income, generally, I like S corp here.
Quote from @Tanner Bellamy:Thank you sir
Quote from @Pete Wolven:
Quote from @Carl Stenberg:
@Adam Burrows the idea here is to create privity between the investment assets and third parties. As such, third parties (lenders, brokers, tenants etc.) should sign contracts with the Management Company and not the Investment Entity to add an extra layer of protection for the Investment Entity against any lawsuits arising from those contracts. For these reasons (and a few more) we typically don't recommend creating a Management Company as a child series of the Investment Entity. Happy to discuss further - feel free to reach out.
Sir - i'm in Orange County, NY. I recently became licensed here in NY to be an agent. I'm almost done with PA license also. I figured i needed a "company" to have my commissions written to, instead of me personally. My accountant thought an S-Corp was the best option - something about being able to do more on the "tax" side? My overall goal is to have my real estate commission checks in that company and have the new s-corp company buy units to rent. Does this sound like a decent plan?
That sounds like a great plan to me. You will eventually want your nonpassive income to be flown through an S corp so you can lower the amount you pay into self employment tax. That said, there is a break even point to determine that and I do not know your financial situation now. But, assuming this is your main source of income, generally, I like S corp here.
Quote from @Pete Wolven:
Quote from @Scott Mac:
Why would the landlord not want to be the managing member/ sole member of the management company and just take its earnings back onto his 1040 directly without passing them through to another shell company?
If the landlord draws a lawsuit while acting under the cover of the management company llc, wouldn't he or she prefer not to have privity with the llc that holds the title to the properties?
Such as in a slip and fall suit, or a broken stair tread lawsuit.
i'm not sure if this for me or the guy above me.
For @Carl Stenberg' .....