CLIENT KNOWLEDGE BASE

    Operating a Management Company Correctly

    For certain situations, our advisory team may suggest the creation of a Management Service Organization to support your business and real estate endeavors.  

    Review of Benefits:
    • Income shifting (if a C Corporation)
    • Hiring Children/Other family in a more efficient manner (vs S Corp)
    • Creation of Earned Active Income for "Fringe Benefit" planning such as:
      • 401k/IRA and Retirement Planning
      • Spousal benefits
    • Consolidate business activities and gain certain asset protection benefits
    Tax Court cases have shown that failure to adhere to certain standards will leave the company null & void. You must practice strict record keeping and operate the company just as any other company would be operated!

    Our team has put together the following checklist and resources to ensure you are maintaining and operating the company correctly. This checklist was developed based on our experiences, IRS guidance and select Tax Court cases in 2020-2022 we reviewed!

    1. 1

      Bank Account

      • Simple yet critical step!  Be 100% sure to open a bank account with your new EIN
      • Do not pay for personal expenses from this bank account
      • Maintain separation of accounts with primary business

    2. 2

      Management Contracts

      1. Contracts MUST be set up with your real estate entities, business entities or any 3rd parties your Management Company is servicing 
      2. Contracts must be at Fair Market Value.  For example, if your company is managing Real Estate, this would typically be at a percentage of rent, 10-20%.
        • Charging 50% would be unreasonable and the tax court would nullify this!
      3. Contract Terms & Expiration
        • Like any other contract, we recommend a fixed term and renewing the contact at various intervals

      Need assistance with setting up contracts?  Reach out and our Implementation team can assist.
    3. 3

      Determine the Fixed, Period Payment Schedule

      1. Management Companies do not work for free!  Nor do they defer payment until 12/31 of each year!  Remember that this company MUST operate like any other.
      2. Create a process to regularly INVOICE and PAY for the Management Services.
        • For example, create a recurring monthly invoice for services rendered (based on contract terms).
          • Ensure the companies being serviced PAY the invoice on a regular basis
          • We recommend monthly or quarterly 
    4. 4

      Set Up Custom Management Company Tracker

      We strongly recommend maintaining formalities and using our simple Google Sheet Management Company Tracker. 

      Each tab has an in depth training video for you to ensure you operate the spreadsheet correctly throughout the year!

      • Track services provided 
      • Track sending of invoices & receipt of payment
      • Simple Profit and Loss Statement Creation (automatic)

      Includes (if applicable)
      • Family Employment Log
      • Section 105 MERP Tracker
    5. 5

      Properly Compensating Children or Family

      In any related party transaction, family must be paid at or very close to Fair Market Value for their efforts and skillset. 

      1. Determine a fixed rate or hourly rate, based on their job description & abilities
      2. Document this!

      If Management Company is a Single Member LLC/Sole Proprietorship:
      1. FICA/Medicare Taxes are excluded for children under 18!  
      2. Set up on Gusto as an employee.  Ensure that rate is entered AND if they are under 18, they are exempt from FICA
      If Management Company is a Corporation:
      1. Same as above but FICA/Medicare is NOT excluded based on tax law




    6. 6

      Add any Employees to GUSTO for Payroll

      Set up Gusto with this link

      If your child is UNDER 13, Gusto needs a parental consent form.  Please email this signed form back to Gusto!

      Gusto Parental Consent

      NOTE - if you need implementation assistance, please contact us!
    7. 7

      Family Employment Log (if applicable)

      We recommend that time sheets and logs are kept for any family that participate in the management company.  

      • Utilize our Family Employee Log sheet
      • Set up with the hourly rates
      • Track ongoing wages
    8. 8

      Set Up of MERP - Section 105 HRA Plan (if applicable)

      • If your advisory team has deemed your management company eligible for an HRA plan, you will want to follow these instructions!
      • Self Service:
        • Visit: Core Documents
          • Select CORE 105 for 1 EE or CORE HRA for 2+
        • Create plan document, sign and put into records

      C Corps:
      1. Owner can directly participate in the plan

      LLC/Sole Prop
      1. Spouse must be hired to ensure coverage for owner.
      2. Ensure that the non business owner spouse is HIRED for Management services and compensated (via 105 Plan or Wages).  Select Family Coverage.
    9. 9

      Use MERP Tracker

      Utilize our MERP Tracker to ensure regular reimbursements & accounting is completed correctly! 
    10. 10

      Ongoing - Keep an Eye on the Profit & Loss!

      • Utilizing our spreadsheets, keep track of the P&L to ensure you are deducting all applicable items!
      • If a C Corp:
        • Do not take any cash out of the Corporation without checking with your team (tax consequences)
    11. 11

      Ongoing - Remember these Other Benefits

      1. Retirement Planning for you & your spouse?  Remember, this can likely be in ADDITION to any plan you already have!
      2. ROTH IRA for children
        1. Wages MUST be paid
        2. Wages must hit a bank for children
        3. Custodial ROTH IRA set up
      3. Accountable Plan Tracking (if applicable in this entity)
    If you still have a question, we’re here to help. Contact us