An owner running several separate businesses — multiple restaurant LLCs, a group of rental entities, a handful of franchise locations — eventually faces the same administrative problem: registering payroll, benefits, and vendor contracts separately in every single entity gets expensive and messy fast. A management company structure is the common fix.
How the Structure Works
One entity is set up specifically to employ staff and hold central administrative functions — payroll, HR, bookkeeping, marketing, IT — and then charges each operating entity a management fee under a written management services agreement in exchange for those services. The operating entities deduct the fee as a business expense; the management company reports it as revenue and pays the actual payroll and overhead costs out of that income.
Why Owners Actually Do This
Centralizing payroll through one entity avoids registering as an employer separately in every state or locality where each operating entity exists, avoids duplicating HR and benefits administration across multiple companies, and creates a single point of employment that simplifies workers’ compensation and unemployment insurance rate calculations instead of tracking them separately per entity. For multi-location operators, this is often as much about reducing administrative overhead as it is about liability planning.
The Fee Has to Be Priced at Arm’s Length
Because the management company and each operating entity are commonly owned, the IRS treats the arrangement as a related-party transaction subject to Section 482, which requires the management fee to reflect what an unrelated third party would actually charge for the same services — not an amount picked to shift income to whichever entity has more favorable tax treatment or an available loss to absorb it. A fee set well above or below a defensible market rate is exactly the kind of intercompany pricing the IRS can reallocate on audit, along with any resulting penalties.
Documentation Is What Protects the Structure
The management services agreement itself needs to specify what services are actually being provided, and the fee calculation needs a defensible basis — a percentage of the operating entity’s revenue, a cost-plus markup on actual expenses incurred, or comparable third-party management fee benchmarks for the industry. A structure with no written agreement, or a fee that changes year to year with no documented reason, is the version of this that doesn’t survive an audit.
How This Differs From a Holding Company
A holding company owns equity in its subsidiaries and captures value through ownership and consolidated returns. A management company doesn’t need to own any equity in the entities it serves at all — it’s a service provider under contract, which means it can serve entities the owner doesn’t fully own, or entities owned by different combinations of partners, in a way a pure ownership-based holding structure can’t.
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Related reading: Holding Company Structures: What They Actually Protect, and What They Cost and Professional Employer Organizations (PEO): An Alternative to Direct Employment for Small Entities.
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