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

[Brandon Ingegneri]

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.  

[Brandon Hall]

@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.