Sole Props

[Earl]

Am I dreaming or was there some law that passed that somehow excludes Sole Props from Control Group regs.?

401(d) was the closest I could find and thats not it... anyone know what i am talking about?

thank you

[Guest Doug Goelz]

Consider the following post by S. Derrin Watson, Esq.

--------------------------------------------------------------------------------

Avoiding Controlled Groups By Staying Unincorporated?

(Posted June 28, 2001)

Question 115: Suppose a husband and wife own separate medical practices. My understanding is that if the husband owns 100% of the stock in corporation A and his wife owns 100% of stock in corporation B, all employees have to be aggregated. Would they be better off as sole proprietors, as partners in a new partnership, or as members of a new LLC?

Answer: No. There are two key issues raised by your question.

Controlled group or common control. It is true that the controlled group rules of IRC section 414(B) apply only to corporations. However, the common control rules of 414©, which are essentially identical, apply to all types of entities. For purposes of whether the employees must be aggregated, the form of the entities is irrelevant

If this isn't enough, I suggest sending an e-mail to Mr. Watson. He really seems to know the controlled group issues.

[Earl]

thank you - another discussion that I had with a friend tied me into what i was thinking of (I think). They are no longer required to cover all employees of all business but rather are just subject to the normal coverage laws:

PAB Q 5:33 Does any special coverage requirement apply if an owner-employee controls another business?

Yes, but only for years beginning before 1997. If an individual was an owner-employee (see Q 5:32) of more than one business and participated in a qualified retirement plan maintained by one of the individual’s businesses (Plan X), all employees of any other business controlled by the owner-employee had to be covered by a plan that gave them benefits at least as favorable as those provided for the owner-employee under Plan X. This rule also applied if two or more owner-employees together controlled another business as owner-employees. [iRC §§ 401(d)(1), 401(d)(2) (prior to amendment by SBA ’96 § 1441); Treas Reg § 1.401-12(l); see also IRC § 414©]

Control meant (1) ownership of the entire interest in an unincorporated trade or business or (2) ownership of more than 50 percent of either the capital interest or the profits interest in a partnership.

Example. In 1996, Debi was the sole owner of a record store and was also a 51 percent partner in a hardware store. The hardware store maintained a qualified retirement plan. No contributions to the hardware store’s qualified retirement plan could have been made on Debi’s behalf unless her record store gave its employees equal benefits under a qualified retirement plan.

This special coverage requirement was one of the few restrictions that applied to qualified retirement plans that covered owner-employees but not to corporate retirement plans. For years beginning after 1996, Debi can participate in the hardware store’s plan because the record store and the hardware store are not trades or businesses under common control (see Qs 5:29–5:31). However, the qualified retirement plan must provide that contributions on behalf of the owner-employee may be made only with respect to the owner-employee’s earned income (see Q 6:41) derived from the trade or business adopting the plan. [iRC § 401(d) (as amended by SBA ’96 § 1441)]