Advanced Underwriting Consultants

Question of the Day – March 20

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question:  My client owns a business with multiple co-owners.  Their attorney has suggested that they create and operate more business entities. Why does that make sense, and how should it affect the owners’ buy-sell plans?

Answer:  It’s hard to know all the reasons that a client’s professional advisers might suggest creating additional business entities.  Any one or more of the following objectives might be relevant:

  • Better liability management
  • Separating lines of business for tax reporting purposes
  • Creating tax management opportunities
  • Structuring more efficient ownership

For those situations where tax management is an objective, we often see situations where the business owners should consider creating entities that are taxed differently.  For example, the owners might create one business that is an S corporation, another that is a C corporation and a third that is an LLC taxed as a partnership.

Normally, where there are multiple entities, we suggest that the owners use an LLC or partnership as the conduit for funding and administering the buy-sell for all the companies.  In general, a partnership’s operating agreement can be drafted in a flexible way to accommodate those circumstances.  In addition, the fact that the owners are partners solves transfer for value problems that might arise in certain buy-sell situations.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day. 

Question of the Day – January 9

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question:  I have a client who operates multiple business entities, all of which are solely owned by him.  Each business has its own employees.  He has a single member LLC, where the client’s son is the only employee.  May the client implement a SEP for his son’s benefit at the LLC without having to include employees from the other entities?

Answer:  No.

Code Section 414 provides that all employees of businesses or trades, whether or not incorporated, under common control shall be treated as employed by a single employer for retirement plan purposes.  The intent of Code section 414 is to make it impossible for the pension plan coverage and discrimination rules to be avoided merely by operating a business as a separate corporation, LLC, partnership, or proprietorship, rather than a single entity.

There are three categories of common controlled groups: brother-sister, parent-subsidiary, and combined groups.

A brother-sister controlled group is two or more businesses in which five or fewer person (a “person” may be an individual, trust or estate) possess ownership interests which are: (a) 80% or more of the ownership of each business, and (b) more than 50% of the ownership of each business taking into account each owner’s identical ownership in each business.

The facts described in the question indicate that the client is subject to the brother-sister controlled group rules.  Therefore, eligible employees from all the businesses solely owned by the clients would need to be included in a qualified plan implemented at any one of the businesses.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day. 

Question of the Day – November 10

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: My client wants to implement a bonus plan for the client’s LLC.  Is the LLC taxed as a corporation, a partnership or a proprietorship?

Answer: It depends.

LLCs are authorized by state statutes.  In general, the owners of an LLC are allowed to elect how the organization will be allowed to be taxed for federal income tax purposes.  In fact, the instructions for the IRS form to apply for a business tax ID make it clear how the LLC can choose different tax treatments for the business.

An LLC can generally elect to be taxed as an S corporation or a C corporation.  If it has two owners, it can elect to be taxed as a partnership.  If there is just one LLC member, it can elect to be taxed as a proprietorship.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.