In general, for a company that offers its employees health insurance benefits, the more employees there, the lower the premium costs are per employee. So if a business owner owns more than one business, it might be tempting to try to bundle all the people they employ under one plan, which would cost less than having two plans in place. However, this can be a classic “penny wise, pound foolish” scenario.
For any financial benefit the business owner might gain, there are significant corresponding legal risks.
What is a Controlled Group?
A “controlled group” of companies is, as the term suggests, a group of companies under common control. The Internal Revenue Code and the Employee Retirement Income Security Act (ERISA) each include their own definitions of a controlled group.
In general, businesses are treated as members of the same controlled group if there is at least 80 percent direct or indirect common ownership between or among different entities. For example, if a parent company owns at least 80 percent of a subsidiary, they would be considered part of a controlled group.
Determining whether two or more entities are part of a controlled group and involves the analysis of a number of factors. For instance, determining ownership is based on the type of business. For a corporation, ownership is based on the percentage of the corporation’s stock owned, and for a partnership, ownership is based on the capital interest or profits interest in the partnership. And a number of attribution rules and constructive ownership rules apply in determining whether entities are part of a controlled group.
In short, it’s complicated. And if you own (in full or in part) multiple businesses, it’s important to work with your legal counsel to understand whether the businesses are part of a controlled group. And if businesses are part of a controlled group, it’s critical that you know the consequences. Indeed, there are real risks—many of them unanticipated by business owners.
What are the Risks of Being Part of a Controlled Group?
Controlled group status applies in various circumstances, such as with respect to tax-qualified retirement plans, welfare plans, and non-qualified deferred compensation plans. ERISA and the Income Tax Code impose significant requirements and liabilities that apply not only to the sponsor of an employee benefit plan but also to other entities that are part of the same controlled group. All entities that are part of the controlled group are treated as a single employer and, therefore, can be held jointly and severally liable, for example, for the pension liabilities of a single entity within the group.
The broader lesson here for business owners is that they need to think carefully (and consult legal counsel) about the formalities of corporate formation and governance. One of the primary benefits of using a corporate structure to conduct business is that it allows a business owner to shield their personal assets from their business liabilities. However, if the business owner doesn’t respect corporate formalities—such as commingling personal and business assets—their personal assets may be exposed.
The same principle applies when it comes to two separate business entities. Each should operate as a separate entity. Failing to do so can lead one entity to be held liable for the debts of another.
In sum, there are reasons to operate multiple entities as a controlled group. But business owners need to think carefully about whether the benefits of doing so outweigh the risks.
If you have questions about these issues, please contact Zana Tomich at Dalton & Tomich.
The business and employment attorneys of Dalton & Tomich take your business just as seriously as you do. Attorneys Zana Tomich and Noel Sterett are trusted by closely held family businesses and others across Michigan and Northern Illinois as invaluable partners and counselors. We guarantee all your calls and emails will be returned within one business day so you can focus on what you do best: running your business.
Having worked with Zana for 10 years, I can attest to her professionalism, her pragmatism, and most importantly, her integrity. I always get sound, thoughtful advice and guidance. From routine filings & updates to the highly unexpected, Zana’s there to help, always responding quickly and […]Read More
We highly recommend Dalton & Tomich! As a start-up firm that has rapidly grown across the country in under 5 years, Dalton & Tomich has been integral to our sound, credible, and excellent in standard infrastructure. As we’ve scaled, Zana has been right by our […]Read More
As a professional photographer in the wedding industry, reliable communication is very important to me. Noel was very knowledgeable and quick to respond to all of my questions and not just that, he also gave me suggestions when reviewing and updating my contract. The entire […]Read More
Zana’s expert guidance has helped us to move forward with clarity and confidence in our business endeavors. She helped us create a new business entity, and a few years later to navigate a tricky buyout—all with a clear path forward for business growth. Her calm […]Read More
Noel’s guidance was much appreciated when redrafting my client contract. He was very professional, respectful of my time and potential costs, and was sincere with his advice. I trusted that he had the highest good for my business in mind. I will seek out his […]Read More
Zana’s expertise in employee law has helped us refine and build a stronger operations and hiring strategy at my company. As a business owner of a small and fast growing company, I very much appreciate Zana’s ability to always step into any situation quickly and […]Read More