A time-honored tradition among many modern entrepreneurs, estate holding and management can be a rewarding business opportunity. However, it can also be intimidating to first-time business owners, as when you are managing propertiesthat you also own, you will need to establish and maintain two companies separate businesses. One business, called a “holding company,”  is the organization that actually owns the property, while a “property management company” has relationships with the tenants, governed by the lease and any other documents you put in place. This is an important distinction to make, as both businesses have unique requirements and must remain separate in order to limit liability your liability. Understanding and respecting the division between the holding company and the property management company is essential if you want your property investments to thrive. It requires a fine balance between investment and management, and those who maintain that balance stand to profit the most.
With regard to a property management business, a holding company is a purely a passive entity that just holds the deed. The term “holding company” comes from the fact that it really doesn’t do anything with the property besides hold onto the deed, aside from a few larger decisions like capital improvements or the selling of assets. Otherwise, a holding company is simply an LLC that holds onto various properties that you purchase. Typically, there are two methods for purchasing a property with a holding company: purchasing the property in your personal name and then transferring over or buying directly through the company itself. Which option you go with will ultimately be based on what type of financing you are able to acquire.
An important factor to consider is whether or not you should set up a different holding company LLC to hold the deeds for different properties. There are three main criteria for deciding to put a deed in a separate entity: Geography, Risk, and Capital.
- Geography: If the properties are in different states, use different LLCs. You should always put Illinois properties into an Illinois LCC, and so on. Furthermore, some cities have specific ordinances, which would complicate matters if you placed property within an LLC tied to a different city or state.
- Risk: If your company is sued, all of the assets in that company are subject to liability. As such, high-risk properties should be in a separate LLC from low-risk properties. You should also only group high-risk properties together if they have a similar type of risk. For example, houses with a fireplace and pool in subdivisions with HOA fees are subject to different risks than a rural house on several acres of land.
- Capital: If you have purchased properties using methods, you will likely want them in separate holding companies. For instance, if you bought one with cash along with one that’s financed, you should probably keep them separated.
Property Management Companies
While your holding company is a passive entity, your property management company is an active participant and might be taxed as an S-Corp. Further, your property management company will be able to manage multiple properties in different holding companies, though you do not want to subject those other properties to liability from the property management company. The property management company is its own separate entity for tax and liability purposes, and in order to keep any liability benefits, you must treat your property management as a completely separate company. If there is reason to believe that your property management company and holding company are working too closely together, it is possible to lose the tax benefits that come from keeping them separate in the first place. Additionally, it is important to note that in the state of Indiana, you cannot manage properties you do not own unless you have a realtor’s license. This also means that if you hire a third-party property manager, you must make sure they have a valid and current realtor’s license as well.
Separation of Investors & Managers
Along with the additional tax benefits that come with keeping your holding company and property management company separate, you also effectively protect yourself from liability should something go wrong. Tenants and contractors will interact with the property management company, not the holding company, so even if there is an issue and a lawsuit is brought against the property manager, your holding company is shielded from liability due to existing in a separate LLC. So long as you and any managers within your two organizations respect the separation of the holding company and the property management company by establishing contracts and monitoring cash flow, you can eliminate much of the potential risk that comes with estate management. It can be a bit complicated to handle, but once you get the hang of things, it makes what was initially an intimidating endeavor into a lucrative business prospect.
 3 Midwest Transaction Guide § 54.221 (2019). “Operating Agreement”
 11 Midwest Transaction Guide § 373.02 (2019). “Nature of Property Management Services.
 26 U.S.C.S. § 1366. “Pass-thru of items to shareholders.”
 I.C. § 25-34.1-3-2. “License required — Persons to whom article does not apply”