Question 208: Joe owns an incorporated law firm. So does his friend Bill. Joe and Bill are unrelated and practice law at separate locations. The two firms each own half of a LLC. Through the LLC, they share the cost of malpractice insurance and of computerized legal research. The LLC has no employees. The LLC's income consists of reimbursements from the firms. Do the law firms and the LLC constitute an affiliated service group?
Answer: No, they do not.

This question comes up frequently. There are two ways to approach it, either of which arrives at the same point.

The IRS "check-the-box" entity regulations are very clear that an unincorporated expense sharing arrangement is disregarded as an entity. That, of course, is exactly what the LLC is -- an expense sharing arrangement. Instead of filing a separate partnership return, the LLC's expenses should simply be reported on the returns of the two firms.

Of course, if the LLC is not an entity, it is not an "organization" and cannot be a FSO, A-Org, or B-Org under the ASG rules. All you have left are the two firms, and they do not have any common ownership. Accordingly, there is no ASG.

Let's take it from another approach for a moment. Ignore what I've just said and pretend that the LLC is treated as an entity, as an organization. Does it perform or provide services, either for the firms or the public? No. (It's hard to perform services without employees.) Do the firms perform services for it? No. That being the case, it cannot be a member of a traditional ASG.

The entity rules and the regulations that govern them are discussed in chapter 1 of my book, Who's the Employer. Affiliated service groups are discussed in chapter 13.

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.