We have several companies that inter-operate. Disclaimer – this is more complicated than you need to get started!
Keep in mind I absolutely run these companies with all the formalities needed to keep them viewed as separate. Intercompany agreements (signed by me as an officer of each company involved), separate bank accounts, etc. The books are kept separately and when money moves around, a separate entry is made in each set of books. For example, when I transfer money from park to management company, it is transferred directly from one online account into another, but it is booked twice – as a payment and corresponding management expense in the park, and as an income item and corresponding credit in the management company’s bank account.
Second disclaimer – I am fudging a little bit betwen what I really do and what I’m explaining below, so that I can keep things a little simpler.
To answer your question: I prefer LLC’s because of the simplicity of formalities (no need for annual meetings, minutes, stock certificates, etc), plus limited liability for ALL owners and pass-through taxation.
For historical reasons, our parks are held in a ParkCo LP (limited partnership) form but when the mortgages roll over I’ll probably change over to ParkCo LLC treated as partnerships for tax purposes. This is just for the (small) added protection of LLC over LP (protects what used to be the general partner from liability). (Note, each park is held in a separate LP company).
Our homes are held in HomesCo LLC, again treated as partnership for tax purposes. We have a written agreement between ParkCo and HomesCo whereby ParkCo does not charge HomesCo for rent on unoccupied homes in exchange for HomesCo advertising and getting people into those homes to get them rented. When a home is rented, HomesCo collects the entire rent and forwards the lot rent for that home (and all the other rented homes) in a lump sum, monthly, to ParkCo. The lot rent for HomesCo lots is the same as the lot rent for owner-occupied lots (no favoritism). The home rent portion is booked as income to HomesCo, and the lot rent portion is booked as rent to ParkCo (does not show up on HomesCo books). We should probably train our tenants to write two checks and not do it the way I explained but we haven’t bothered (yet).
HomesCo has employees that fix rentals and rehab homes for rent/sale. As you can imagine, HomesCo does not make much money. We sometimes have to put money into HomesCo (owner contributions), but sometimes we can take some out (e.g., after a set of sales).
We also have FinanceCo LLC. FinanceCo is a little more complicated to run, we have various licenses, information sharing agreements, etc. When a home is sold, the purchaser pays their d/p to HomesCo and signs the bill of sale. They also sign paperwork with FinanceCo for a mortgage* (actually a “retail installment contract” ). FinanceCo pays the remainder of the sale price to HomesCo so that HomesCo is made whole. If there is a default, the process is reversed (HomesCo buys the repo’d home back from FinanceCo).
Finally, there is ManagementCo LLC (treated as S-corp for tax purposes). This is our sole S-corp, and we chose S-corp so that we can pay ourselves salaries and be eligible for various employment benefits. ManagementCo charges all of the other companies a management fee. That’s an expense for those other companies and income to ManagementCo. Out of that fee income, ManagementCo pays for our travel expenses, internet and phone expenses, salary, payroll taxes, office expenses, etc.
All these companies’ net income flows through to our personal tax returns and we pay income tax on our wages (paid by the S-corp) plus the remaining profit from the companies. You should talk to a tax advisor for the self-employment tax implications of this setup – it depends on who the partners/members of the companies are and what they do. One of the main advantages of S-corps is that the law is clearer about what is required with respect to the self-employment (payroll) tax.
Whatever cash is left over in the companies we can take out as ownership draw.
Why do we do things this way? Primarily to keep our separate businesses separate – for our own management use, but also for the bank (which doesn’t want to see our other businesses muddying up the P&L statements we provide for loans), and most importantly for limited liability. This paid off at least once when a bank foreclosed on a park we owned but the homes were held by a different company. Everything was properly documented and the homes could not be seized by the bank. Or (heaven forbid! ), if there was ever a “slip and fall” in one of our homes and we were sued, it should be easier to show that only HomesCo and/or ManagementCo should be liable.
Before we got so complicated (which was only recently) we only had HomesCo and ParkCo. We did all management as “owners” of the companies (with no salary!) and did all the sales and financing through HomesCo. In the end, for us, the extra overhead of splitting our operations into separate companies is not that great and I like the “cleanliness” of running our separate business operations in separate companies.
Did that answer your question?