CPA Question: Separate Management and Real Estate LLCs

[Matt Davis]

I am a partner in a three-member LLC that holds a multifamily in Lowell Massachusetts.

Currently, I am providing property management services for the building. The other members are not involved in property management at all. In return for my services to the partnership, I am being paid a typical 8% gross rents property management "fee" from the LLC (before and separate from any distributions). I'm believe this "fee" would be a "guaranteed payment" from the LLC, but it's still real estate income, Correct? Or is it earned income?

Now, I have an idea, but I’m not a CPA so I’m not sure if it would work:

I'm considering setting up a single member LLC for the property management. This way the partnership would pay the fees to my Property Management LLC. Now the property management fees won't be a "guaranteed distribution" but would be an expense to the partnership and revenue to the second LLC. Now if I purchase some supplies (tools for example) my LLC can own/deduct the cost of those tools from the management fees, and the supplies don't belong to the partnership. Additionally, these management fees aren't real estate income anymore, so if the Property Management LLC has a loss at the end of the year, I can deduct those losses from my W2 income even though I'm not a real estate professional. Right?

What am I missing? Is this allowed? Can my partnership pay my single member LLC and then issue a 1099 at the end of the year? What are the drawbacks, besides the cost of the second LLC registration?