The Family Management Company

How it works

A management company is a second entity the same owner controls, paid a fee by the operating business for services the business would otherwise perform itself. The fee is deductible under Section 162(a) as an ordinary and necessary business expense, provided it is for services actually rendered and the amount is reasonable. On its own that is unremarkable; businesses pay other businesses for services constantly.

What turns this into a planning position is the deliberate choice of entity for the management company. It is not a corporation; it is a sole proprietorship, or a partnership whose only partners are the owner and spouse. That choice looks cosmetic until you see what it unlocks: a sole proprietorship or an all-parent partnership can employ the owner's own minor children under payroll tax exemptions a corporation, including an S corporation, cannot use at all.

Three things stack on top of each other

• The kid-payroll exemption, the real reason to build this. Wages a sole proprietorship or an all-parent partnership pays to the owner's own child under 18 are exempt from Social Security and Medicare tax under Section 3121(b)(3)(A); wages to a child under 21 are exempt from federal unemployment tax under Section 3306(c)(5). Both exemptions disappear the instant the payer is a corporation, including an S corporation, which withholds FICA on a child's wages like any other employee's. A non-corporate management company restores the exemption without touching the operating company's S election.
• A shift of some income onto the kids' own returns. The wages are deductible to the management company and taxable to the child as earned income, sheltered by the same standard deduction any wage earner gets, an amount indexed each year; for 2026 it is $16,100 for a single filer, up from $15,750 in 2025.
• A modest rate and QBI position, entirely federal. Florida has no individual income tax and does not tax pass-through income at the personal level, so there is no state-side arbitrage here. Federally, Section 199A's qualified business income deduction, made permanent for years beginning after December 31, 2025, can apply at the management company owner's level, though a thin company with little payroll or assets should confirm the wage and basis limitation before assuming the full deduction applies.

Strip away the ordering and the honest summary is this: the structure mainly lets an S corporation owner do what a sole proprietor or a spousal partnership can already do, which is put the kids on payroll without paying Social Security and Medicare tax on their wages. The pure income-shift piece, moving income into a commonly owned entity with no real change in who does the work, buys little by itself and draws the most scrutiny. Entity choice is doing nearly all of the work here; I cover the broader tradeoffs in how to choose between a sole proprietorship, an S corporation, and a C corporation.

What this does not cover

Everything above describes one direction only: an operating S corporation paying a fee to a non-corporate management company, for the kid-payroll exemption. The reverse direction, a C corporation paying a fee up to a holding company taxed as an S corporation to move cash out without a dividend, is a different and considerably weaker fact pattern, and nothing here supports it. A post-reorganization holding company typically has no employees, no operations, and no function beyond owning stock, so a fee paid to it fails the real-services test on nearly every factor at once, and it carries a problem specific to that direction: the S corporation receiving the fee is subject to the one-class-of-stock rule of Section 1361(b)(1)(D), which forbids paying any shareholder a preferred or disproportionate return. For moving cash out of a C corporation, the defensible tools are retention and reinvestment, C-corporation-only fringe benefits, a qualified retirement plan, defensible reasonable compensation, rent on property the owner genuinely owns, and a benchmarked license for real intellectual property, not a fee paid to an entity with nothing behind it.

Who this applies to

Two separate entities have to exist and stay separate, and the entity type on each side of the transaction is what decides whether any of this works.

• The operating business. It has to be a corporation, S or C, for the kid-payroll piece to matter. If it is already a sole proprietorship or a spousal partnership, it can hire the kids directly under the same exemptions with no second entity needed; adding a management company there is cost without benefit.
• The management company. It has to be a sole proprietorship, including a disregarded single-member LLC owned by one spouse, or a partnership whose only partners are the owner and spouse. An LLC that elects S corporation status does not qualify: the election makes it a corporation for FICA purposes, which is the single most common way this structure fails before it starts.
• The same ownership on both sides. Section 482 is relevant precisely because one person or family controls both entities; a fee between genuinely unrelated parties would not draw the same benchmarking scrutiny.
• The children. They have to do real, age-appropriate work, the same substantive bar any family-employment arrangement is held to. The management company does not relax that bar; it only changes which entity may pay the child without withholding FICA.

Whether the S election was the right call in the first place, and what reasonable-compensation rules already require of the owner regardless of any management fee, are worth settling before adding a second entity on top; I cover that in my Florida S-corp guide.

What it requires

Past the entity-type threshold in that table, four more conditions have to hold together for the fee itself to survive review.

• Real, identifiable services actually performed. Bookkeeping, marketing, human resources, equipment, or back-office administration are the ordinary examples. The two-prong test courts apply to management fees under Section 162(a), services actually rendered plus a reasonable amount, is the same test applied to salary.
• A fee benchmarked to what a stranger would charge. The standard is what an unrelated party would pay for like services by a like enterprise under like circumstances; cost-plus pricing or a market rate per function is defensible, while a flat percentage of profits keyed to ownership is the pattern that has already lost in court.
• A written agreement that predates the services. Signed and dated before work begins, specifying the scope of services, the deliverables, and how the fee is computed. A fee set after the fact, or with no writing at all, reads as a distribution wearing a fee's clothing.
• Age thresholds tracked separately for each tax. The FICA exemption ends at 18; the FUTA exemption ends at 21. A payroll process that treats the two as one gate will eventually apply the wrong rule to a child between those ages.

What you need to document

Every item below exists because its absence is specifically what has sunk a management fee in litigation. None of it is exotic. All of it has to be contemporaneous rather than assembled after the return is filed.

The management-services agreement

Signed and dated before services begin, naming the scope of services, the deliverables, the billing method, and the formula or rate behind the fee.

A benchmarking memo

Whatever supports the fee as a stranger's rate: published rate data, a quote from an unrelated provider, or a documented cost-plus calculation. A self-generated number cannot replace this.

Monthly invoices

Real invoices tied to the services actually rendered each month, not a single entry added at year end.

A separate EIN and bank account

Its own identity on paper and in practice. Money that runs through the operating company's account, or a fee never actually paid, is not a fee.

Payroll records for the children

A completed Form W-4, timesheets for actual hours worked, the federal payroll filings the exemptions still require, and wages paid into an account the child controls.

Owner minutes adopting the arrangement

A short written record that the owner considered and adopted the management arrangement, dated at or before its start.

Forming the management company also creates its own state-level filing obligations; I cover what a new Florida entity owes every year in my Florida LLC annual report guide. It also has its own choices to make about accounting method and the treatment of its formation costs, covered separately under a small business's accounting method and startup and organizational costs.

Where it goes wrong

Intercompany management fees between commonly controlled entities are a standing audit target, and the exposure runs in two directions at once: the fee can be disallowed outright as a disguised distribution rather than a genuine Section 162 expense, and Section 482 separately lets the government reallocate income between the two entities. Losing on either theory restores the operating company's income and its tax.

What the Tax Court did in Aspro

Aspro, Inc. v. Commissioner is the clearest roadmap for what a management fee needs. It is a Tax Court memorandum affirmed by the Eighth Circuit, so it is persuasive rather than controlling for an Eleventh Circuit practice like mine. It earns its place because the fee there failed on nearly every ground at once: no written management-services agreement, no invoices or billing records, a fee not set in advance, and a fee amount that tracked the shareholders' ownership percentages rather than the value of anything performed, the clearest sign of a disguised distribution. Expert testimony offered in support of the fee was treated as opinion rather than a documented methodology. The fee was disallowed in full, and the decision was affirmed on appeal.

Running underneath Aspro is the older assignment-of-income doctrine from Lucas v. Earl: income is taxed to whoever earns it, and relabeling it as a fee paid to a commonly controlled entity does not move the liability unless real work actually migrated there too. The business has to be doing something different, not merely billing for it differently.

The recurring mistakes

• Letting the management company become a corporation. Electing S status on what should stay a sole proprietorship or spousal partnership silently ends the FICA and FUTA exemptions the entire arrangement exists to capture.
• A fee that is really a distribution schedule. Any formula tied to ownership percentage rather than to services performed reads as a distribution the moment it is examined.
• No documentation until the return is being prepared. Timesheets, invoices, and the benchmarking memo have to exist because the work happened, not because a return needed support.
• Treating the management fee as a substitute for reasonable compensation. It does not change the W-2 wages the owner still owes himself from the operating S corporation; reasonable compensation still gets imputed regardless of what the management company is paid.
• A management company with income but no wage base. A thin company with little W-2 payroll or few assets can run into the wage and basis limitation under Section 199A once income clears the threshold, cutting the deduction expected.

A situation where this comes up

The pattern I see most often is an S corporation owner whose teenagers already do real work for the business: filing, scheduling, social media, running supplies. They are either unpaid or already on the S corporation's payroll with FICA withheld like any other employee. Nothing about the work changes when a management company gets added; what changes is who legally employs the kids.

What usually has to change is broader than payroll. The management company has to be a real entity with its own bank account and its own reason to exist, doing enough for the operating company that the kids' wages are one line inside a genuine services relationship, not the entire content of the arrangement. A management company whose only function is a FICA-free paymaster for two teenagers looks exactly like what it is, and that is not the fact pattern that survives an examination.

The version that concerns me is the one built backward: a fee sized to move a target amount of income, the services described afterward to justify it, no independent benchmark, and a percentage that happens to match the owner's stake in both entities. That is the Aspro fact pattern in miniature, and the paperwork that would have saved it either exists from the start or does not exist at all.