Episode C focuses on ownership, and how it impacts qualified plan design. What if you own 2 companies outright? What if you only own part? What if the other owner is your spouse? We break it down for you, to give you the gist without being overwhelmed.
Episode C focuses on ownership, and how it impacts qualified plan design. What if you own 2 companies outright? What if you only own part? What if the other owner is your spouse? We break it down for you, to give you the gist without being overwhelmed.
This episode focuses on the letter C: Common Ownership.
For Episode C: we’re going to talk about ownership impacts qualified plans. What if you own 2 companies 100%? What if you own 2 companies 25% each? What if the other owner is your spouse? There’s a lot of rules – surprise surprise – but don’t worry – we can help. Let’s talk it through.
· First, let’s focus on the basics on common ownership, and what you need to think about if you own more than one business and want to sponsor a plan. And for each case, we’ll throw an example in there to make it easier to follow – should be clear as mud by the time we’re through! This is important though – if 2 companies are under common ownership, we need to include all of those employees in our plan design – if not, the plan could be disqualified, and that’s bad news all around.
· What’s ownership? Generally considered owner if own 5% or more. Also, if your spouse, your children, your parents or grandparents, work there, they are considered owners too. Yep, just because they’re related to you, they’re owners. So when we talk about ‘owners’ – it’s not just the people that run the business day in and day out – it’s your immediate family. This does NOT include anyone other than your spouse, your children, your parents, or your grandparents. Cousin? Nope. Brother in law? Nope. Uncle? Sister? Ex-spouse? No, no, no.
· FUN FACT: Minor child (under 21), doesn’t matter if spouse works at your biz or not – still a CG. Just because of the kid. So, if you’re a CPA and spouse is a lawyer, having 2 sep biz’s, if you have children, you have to count both biz’s when looking at a plan. Once they turn 21, you can have 1 plan for each biz. Idk if that’s fun or not … but it is what it is.
· Back to ownership… established who an owner is. Move on to common ownership of businesses, and 3 diff types of rules. First easiest – controlled group. CG 2 or more businesses under common control. What’s that? One of 2 things – first is 80% common ownership. That’s pretty easy – I own 100% of one, 80% of another – CG. 80% of one, 50% other – not CG, unless my spouse owns the other 50%. Remember, spouse’s ownership is mine – so 50/50 w spouse is same as 100% me. Pretty tricky, right? But this one is as clear as it gets. The 2nd definition if there’s less than 5 owners having 80%, and identical ownership more than 50%. A little trickier – lets say 3 buddies buy a business and own it 1/3 each. Two of them decide to invest in another business together, but they leave the other one out. There’s 3 owners having more than 80% in total – the 3 of them own 100% of both. What’s identical ownership? The 2 guys in each – they own 67% of the first biz, and 100% of the next. So this is a CG.
· CGs are all about the numbers – if you can figure out who the owners are, and their %’s, it’s just math.
· Next is Aff Svc groups. I think these rules came in because people were finding a way around the CG math, to be honest. An aff svc group is when businesses are NOT in a CG, but they’re related. One of them needs to be a svc org: performance of svcs is principle business. Build tables, not svc. A doc, or CPA, that would be.
· One of the ways to be Aff svc group has a 2 part test: first, the 2nd biz is a partner or shareholder in the svc org (doesn’t matter what percentage), 2nd is that there’s a working relationship – the biz regularly performs services for the svc org. What does this mean? “Facts and circumstances are used to determine whether a working relationship exists”. That’s helpful, isn’t it? Best ex: Doctor owns biz, is 50/50 owner w other doc for a lab. Lab only does work for that doctor. That’s a pretty clear working relationship, even though the math w CG doesn’t work.
· 2nd way is that if the most of the 2nd biz’s work is to perform svcs for the svc org, and they’re performing svcs that used to be done by the svc org’s ees. One more piece – 10% or more of the biz must be held by highly paid employees of the svc org. What does this mean? You can’t start up a new company, fire all of your staff and rehire them over in the other company, and call that 2 different companies.
· FUN FACT about biz ownership in the US: – did you know that there are 28MILLION small businesses in the US - outnumbering corporations by 1,162 to 1. Talk about small, but mighty!
· Final way that common ownership can be defined is through mgmt. organizations. This happens when a biz performs mgmt. functions, and their principal business is doing this on a regular and continuing basis for another biz. No ownership, no service biz – it just looks at mgmt. functions. Ex – HR and payroll organization does all HR and payroll for one company. Clearly a mgmt. org. What’s NOT a mgmt. org? If 1 org manages a bunch of companies – saw this with a dental franchise. The mgmt. co took care of benefits, payroll, HR functions – but it didn’t do that for just one other company, it did it for close to 40 companies. So this was NOT common ownership.
· FINAL FUN FACT: we know all of these rules so that you don’t have to. Best news you’ve heard yet in this edition, right?
· Wrapping it all up – this stuff is confusing! And complicated! And Technical!! Yes it is. What you should remember is that there are crazy complex rules when it comes to common ownership, and if an owner owns anything other than the one business, we need to check it out to see how we need to set up the plan, and who should be included.
· Have any questions? Shoot me an email at MRS@gmail.com. Thanks for listening in – and have a great rest of your day.