Management Group

[austin3515]

Let's say Owner A owns 40% of 5 different Companies (each separate LLC's which own separate franchises). The remaining 60% is owned by the operator and is always an individual unrelated to Owner A. Owner A owns 100% of "Back Office Co." Back Office Co handles the accounting, payroll, advertising, human resources, and other services that are required for each of the 5 Companies. Each of the 5 Companies pays a servicing fee to Back Office Co.

Back Office Co. employs about 12 people to do all of this work, almost all of whom are NHCE's.

Would this be considered a Management Group? Are these Management Functions? Couldn't a case be made that the principal purpose of this entity is NOT management? It's really overhead. Note that hiring/firing decisions are made at the franchise level, and the operations are managed by the 60% owner. Granted, Owner A does play a big role, but he is just one employee of many at Back Office Co. Each LLC has between 50 to 100 of its own employees.

DOes the answer change if the ownership exceeds 50% (i.e., because they would be considered related)? I suppose the answer is "if this entity provides management services" the answer is yes.

There must be a PLR or something on this stuff...

[Flyboyjohn]

Is owner A the money man and the brains or do the operators have substantail capital invested?

Sort of unusual owner A would give up over 50% ownership unless there were some protections if the operator didn't work out (repurchase options, rights of first refusal, etc.), do you know of any such side deals?

Call me cynical but I'm smelling an attempt to make the businesses "unrelated" when it's really owner A running the whole show.

[J Simmons]

I agree that Flyboyjohn's concerns should be investigated.

The HR functions are likely 'management functions'. See pages 7-77 through 7-79 of www.irs.gov/pub/irs-tege/epchd704.pdf.

1. Daily business operations (such as production, sales, marketing, purchasing,

and advertising),

2. Personnel (such as staffing, training, supervising, hiring and firing.),

3. Employee compensation and benefits (such as salaries and wages, paid vacations and holidays, life and health insurance, and pensions),

4. Short-range and long-range business planning (such as product development, budgeting, financing, expansion of operations, and capital investment),

5. Organizational structure and ownership (such as corporate formation, stock issues, dividends, mergers, and acquisitions),

6. Any other management activity or service, and

7. Management activities and services also include professional services that relate to services listed in ##1.-6.

Barring some attribution of the 60% owned by the unrelated operator of each franchise (and if none of the franchises themselves are related--section 144(a)(3)-->section 267) then I think it would be an uphill battle for the IRS to succeed in claiming that the principal business of Back Office Co is performing management functions for 1 organization or 1 group of related organizations. The separate recipients of the management functions seems diffuse enough to belie the assertion that those performed for just 1 of the franchises is the principal business of Back Office Co.