Per IRC Section 414, a controlled group is any two or more corporations connected through stock ownership in any of the following ways:
Parent-subsidiary group
- 80% of stock of each (subsidiary) corporation is owned by another member of the group
- Parent corporation must own 80% of the stock of at least one of the other members of the group
- The rules are subject to the stock attribution rules under Internal Revenue Code Section 318
Brother-sister group
- The same five or fewer individuals own at least 80% of the stock of the corporations
- “Individual” includes ownership by an estate or trust
- “Ownership” includes having a controlling interest and effective control of the corporations
- The rules are subject to the stock attribution rules under Internal Revenue Code Section 318
Combined group
- Combination of a Parent-subsidiary and a Brother-sister group
IRC Section 414(b) and (c) requires that all employees of commonly controlled corporations or trades or businesses be treated as employees of a single corporation or trade or business. Due to abuse of these rules, the IRS enacted IRC Section 414(m) which covers Affiliated Service Groups.
Who is part of a controlled group?To determine whether you are part of a controlled group, you must consider stock attribution rules. The purpose of the stock attribution rules is to attribute shares, or interest in a company held by certain family members, to the person in question and determine whether that person is part of a controlled group.
Pursuant to IRC Section 318, an individual shall be considered as owning the stock, owned directly or indirectly, by or for:
(i) his/her spouse (other than a spouse who is legally separated from the individual under a decree of divorce or separate maintenance)
(ii) his/her children, grandchildren, parents
Companies in a controlled group can be treated as separate companiesA company can request to be treated as a Separate Line of Business under IRC Section 414(r) . The following are limitations for these requests:
- Must have a valid business purpose
- Must have at least 50 employees within each line of business
- Restrictions on HCE ratios in each separate line of business
- Must notify IRS to request their approval
See Can I Have a solo 401(k) if I also have employees for more information.