Business Structure

Hello Everyone,

I’m closing on a park next week and I’m trying to sort out how the various businesses pay each other. I have the park owned by my ownership LLC and managed by a s-corp. What is a reasonable compensation to pay the s-corp to manage the park? I’m assuming a percentage of the lot rent. All of the lot rent should be mailed to the s-corp and distributed to the LLC after taking out the compensation or does the lot rent go to the LLC and then a check sent to the s-corp for manageing the park? Who pays the various expenses, trash, water, electricity? LLC or the s-corp? I don’t want to comingle any funds and lose any protection that the LLC provides. Thanks

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we pay our s corp 3%. The park pays for all of the evections etc, the S corp just manages the managers and the park for the park. Sort of like a consultant gets paid to make decisions. You can always bill the MHP from the S Corp if something funky requires more time or energy.

This is a great question and we’re actually setting up the exact same thing this month.

I think we’re going to have our S-corp bill our parks something like 4% of the gross. The park will pay for its own expenses (utilities, insurance, advertising, maintenance, payroll, legal fees, etc). Pretty much the only thing coming out of our S-corp will be our salaries, home-office-type expenses, and travel expenses for our periodic inspections.

In our case, we rehab, rent, & sell homes as well (through a separate LLC) and we’re still deciding how to apportion the management fee for that. I think we’re going to do some percentage of the net value of the homes rather than a percentage of the income. Anyone want to share how they dealt with this?

I don’t know if we’re going to stick with 4%. I did some digging online and for apartments, the going rate seems to be more like 10% (plus first month’s rent for new tenants)! This seems really high, but in the end, it’s just your left hand paying your right hand so whatever works for you will probably be fine, as long as it’s “reasonable.” And “reasonable” has some pretty wide latitude.

To answer your other question, as long as you are controlling both the S-corp and the LLC, I suppose you could do it either way, but your financing bank may have a problem with your taking the rents into the S-corp first. Unless there is some kind of third-party interest and you’re trying to keep money out of their hands (like someone else controls the park & you control the S-corp and want to make sure you get paid first), I would have the park collect the rents and treat the management fee as any other park expense. That is probably what the banks and buyers will expect when you refinance or sell.

Happy to hear other thoughts on this topic!

Brandon@Sandell

We pay our SCorp around 3- 5%. For us it only really matters if the LLC has partners. Otherwise you are just paying yourself.

Bret

Thanks for everyone’s opinions. I think we’ll go with 4% and run everything through the park ownership llc.

We are big fans of the asset protection teachings of Dyches Boddiford and Pete Fortunato. They show investors how to use land trusts, single and multi-member LLCs, and more to protect assets and retain some privacy.

To your continued success,

-jl-

Is the S-corp strictly for management fees? My park is a C-corp. Should I be looking at switching to a LLC/S-corp structure? I have another community that I set up as a LLC when I purchased it but don’t have a S-corp for management fees. Any further information would be greatly appreciated.

Brandon,

Is the LLC used for the purpose of financing, refinancing, and selling? And is the s-corp used for the purpose of paying yourself? I’m sure there are many other reasons as well but I’m concerned with your main reasoning behind this.

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?

Brandon@Sandell

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Yes, great stuff, well thought out. I’ve read over this a few times.

Brandon,

So if I understand this correctly you pay your park managers out of the Park LLC and not the Management S-Corp? What was the reason for not employing and paying your park managers through the Management Company?

Thanks,
Jason