Two Companies – One New Hire
Question:
We want to hire one person to work full-time for our ancillary company that is set up as a separate limited liability company. Do we run this payroll through our primary operating company or do we instead set up this person as an employee of our ancillary company?
Answer:
Of course “it depends”.
If the individual will work exclusively for the ancillary firm, then it may make sense to run payroll through the ancillary company. However, if there is any crossover, then it makes sense to run payroll through the primary company.
Ultimately, your decision hinges on certain long-term considerations – will there be a retirement plan, will there be a section 125 cafeteria plan with health insurance benefits, full-time crews, etc.
Since both the primary company and the ancillary company have common ownership, the companies are treated as one for most retirement and employee benefits plans. And there is nothing wrong with having a management fee agreement between the two.
Thus it may make sense to run all payroll through the primary company with accounting allocations (journal entries) between the primary company and the ancillary company rather than running and maintaining two separate payrolls. Accordingly, administrative burden logically should also be a consideration, especially for an already taxed staff department.
There is no one correct answer. You have options and you can always change your position should the ancillary company become a flourishing stand-alone venture.
