B16 2330 IntercompanyTransactions HOT 358400
More than one company?
Unique and complex transactions
Presented by: Diane C. O. Gilson President, Info Plus Accounting, Inc. Certified Advanced QuickBooks® Pro Advisor e-mail: [email protected] © Info Plus Accounting, Inc. Ann Arbor, MI 48104 web: www.BuildYourNumbers.com + www.InfoPlusAccounting.com
This session : Working inside the maze
Eyes wide open… What forms can interactions take? The inter-company “Commandments” Consequences for breaking the rules Recommendations
More than one company? Introduction to inter-company transactions, billings, loans and transfers
What forms can inter‐company interactions take? If you have more than one company, a whole variety of inter‐company scenarios can occur (let’s just start with a two‐company illustration): 1. Company A performs services for Company B and passes the costs through to Company B at cost. 2. Company A performs services for Company B and passes the costs through to Company B at a standard profit. 3. Company A performs services for Company B and charges Company B a “management fee”. 4. Company A has more cash available than Company B and periodically lends money, interest‐free, to Company B. 5. Company A has more cash available than Company B and pays Bills on behalf of Company B. 6. Company A has access to a credit line that Company B does not have, accesses the credit line with the intent of passing the funds through to Company B, and then either lends the money to Company B OR pays Bills on behalf of Company B. 7. Company A owns land and Company B does construction work, and when they sell the finished spec home loans get paid off and funds get split up between them. 8. Company A & B have all sorts of commingled funds (sometimes including owners’ funds) and legal property titles and loans are in various names. No one is quite sure who owes who what. 9. The books for Company A at 12/31/xx shows that Company B owes them $243,175. The books for Company B at 12/31/xx shows that Company B owes Company A $127,500. Both companies are owned by the same owner(s). What happened to the difference of $115,675? 10. Company A holds property that it rents to Company B. Company B pays the mortgage and various maintenance costs on the property it is renting. Now consider a circumstance where you have not just 2, but 3, 4, 5, or more companies. … And this has been going on for 2, 3, 4 or more years. Is your mind spinning in circles yet? I call these the “Top 10 Inter‐company crazy‐makers.”
© Info Plus Accounting (may not be used or re-printed without permission)
Page 1
More than one company? Introduction to inter-company transactions, billings, loans and transfers
Here are the inter‐company “Commandments”:
1. Inter‐company due to/due from account balances shall always be equal. 2. Intercompany “at‐cost” pass‐through transactions should not impact gross profit results 3. Management fees shall be reasonable and reflect the value of services rendered. 4. Intercompany loans are FAR better than inter‐company payment of Bills – but should be documented and formalized. 5. Intercompany due to/due from accounts should accrue appropriate interest income and cost – otherwise the bottom line for each company does not reflect reality. 6. Detailed Bill information should be recorded in the company that incurred the cost, and recorded as a “Due to” if another company paid it. 7. If a company pays a cost for another company that cost should not be recorded as COGS or expense, etc., but should be recorded as a “due from”. 8. Assets should be recorded in the correct company (i.e., the company that actually holds title) 9. Liabilities should be recorded in the correct company (i.e., the company legally named in the Note Payable) 10. Loan payments should be made by the company that holds the debt. If the company needs to borrow money for operations, it should be brought directly into the company as another loan, and funds disbursed from that company. 11. When 1 company holds land, and the other performs construction: a. Land development activities and holding costs should be confined to the land development company. b. Construction costs should be confined to the construction company. c. When the final sale takes place, the sale of the land and the sale of the home should reflect separate transactions if at all possible. d. If separate transactions are not possible, the sales price of the land, vs. the sales price of the house should be clearly indicated. 12. If a company is established to perform a certain activity (e.g., own property and rent it to another company) it should perform those activities as if it was independent from the related company. E.g.: a. It should pay the same costs, prepare the same contracts, etc. as another independent company would. b. If funding is required, and the related company can loan money, then legal borrowing documents need to take place (even if it’s with a related company).
© Info Plus Accounting (may not be used or re-printed without permission)
Page 2
More than one company? Introduction to inter-company transactions, billings, loans and transfers
Consequences
Commingling company activities can ultimately have huge legal and cost ramifications. Just some of the problems include: o It’s just hard to know what the real profitability for each of the companies is. (Presumably they were created to fulfill a specific financial or legal purpose.) o It’s much easier for fraud to occur when no one can tell what’s going on. o Job costs aren’t properly stated so it impacts tax results. Bad filings penalties, interest, etc. not to mention ongoing audits. o If one or more partners or stockholders withdraws, or there is a divorce, or a death, there will be a REAL mess to deal with – and it’s much worse under those stressful circumstances. o It will cost a lot to unscramble the mess. o When the results are so commingled, “the corporate veil has been pierced” so all companies are at risk if any of them are sued. o You may need to actually shut companies down, and start over with new ones (even more time and expense).
Recommendations – primarily for owners (but you can help recognize the problem!)
Get expert help – and the sooner, the better. o This type of situation turns into a very sticky, difficult‐to‐maneuver maze very quickly. o I have seen ALL of the above consequences occur. o Be sure that you are dealing with someone who is reputable, and knowledgeable.
© Info Plus Accounting (may not be used or re-printed without permission)
Page 3
Unique and complex transactions
Presented by: Diane C. O. Gilson President, Info Plus Accounting, Inc. Certified Advanced QuickBooks® Pro Advisor e-mail: [email protected] © Info Plus Accounting, Inc. Ann Arbor, MI 48104 web: www.BuildYourNumbers.com + www.InfoPlusAccounting.com
This session : Working inside the maze
Eyes wide open… What forms can interactions take? The inter-company “Commandments” Consequences for breaking the rules Recommendations
More than one company? Introduction to inter-company transactions, billings, loans and transfers
What forms can inter‐company interactions take? If you have more than one company, a whole variety of inter‐company scenarios can occur (let’s just start with a two‐company illustration): 1. Company A performs services for Company B and passes the costs through to Company B at cost. 2. Company A performs services for Company B and passes the costs through to Company B at a standard profit. 3. Company A performs services for Company B and charges Company B a “management fee”. 4. Company A has more cash available than Company B and periodically lends money, interest‐free, to Company B. 5. Company A has more cash available than Company B and pays Bills on behalf of Company B. 6. Company A has access to a credit line that Company B does not have, accesses the credit line with the intent of passing the funds through to Company B, and then either lends the money to Company B OR pays Bills on behalf of Company B. 7. Company A owns land and Company B does construction work, and when they sell the finished spec home loans get paid off and funds get split up between them. 8. Company A & B have all sorts of commingled funds (sometimes including owners’ funds) and legal property titles and loans are in various names. No one is quite sure who owes who what. 9. The books for Company A at 12/31/xx shows that Company B owes them $243,175. The books for Company B at 12/31/xx shows that Company B owes Company A $127,500. Both companies are owned by the same owner(s). What happened to the difference of $115,675? 10. Company A holds property that it rents to Company B. Company B pays the mortgage and various maintenance costs on the property it is renting. Now consider a circumstance where you have not just 2, but 3, 4, 5, or more companies. … And this has been going on for 2, 3, 4 or more years. Is your mind spinning in circles yet? I call these the “Top 10 Inter‐company crazy‐makers.”
© Info Plus Accounting (may not be used or re-printed without permission)
Page 1
More than one company? Introduction to inter-company transactions, billings, loans and transfers
Here are the inter‐company “Commandments”:
1. Inter‐company due to/due from account balances shall always be equal. 2. Intercompany “at‐cost” pass‐through transactions should not impact gross profit results 3. Management fees shall be reasonable and reflect the value of services rendered. 4. Intercompany loans are FAR better than inter‐company payment of Bills – but should be documented and formalized. 5. Intercompany due to/due from accounts should accrue appropriate interest income and cost – otherwise the bottom line for each company does not reflect reality. 6. Detailed Bill information should be recorded in the company that incurred the cost, and recorded as a “Due to” if another company paid it. 7. If a company pays a cost for another company that cost should not be recorded as COGS or expense, etc., but should be recorded as a “due from”. 8. Assets should be recorded in the correct company (i.e., the company that actually holds title) 9. Liabilities should be recorded in the correct company (i.e., the company legally named in the Note Payable) 10. Loan payments should be made by the company that holds the debt. If the company needs to borrow money for operations, it should be brought directly into the company as another loan, and funds disbursed from that company. 11. When 1 company holds land, and the other performs construction: a. Land development activities and holding costs should be confined to the land development company. b. Construction costs should be confined to the construction company. c. When the final sale takes place, the sale of the land and the sale of the home should reflect separate transactions if at all possible. d. If separate transactions are not possible, the sales price of the land, vs. the sales price of the house should be clearly indicated. 12. If a company is established to perform a certain activity (e.g., own property and rent it to another company) it should perform those activities as if it was independent from the related company. E.g.: a. It should pay the same costs, prepare the same contracts, etc. as another independent company would. b. If funding is required, and the related company can loan money, then legal borrowing documents need to take place (even if it’s with a related company).
© Info Plus Accounting (may not be used or re-printed without permission)
Page 2
More than one company? Introduction to inter-company transactions, billings, loans and transfers
Consequences
Commingling company activities can ultimately have huge legal and cost ramifications. Just some of the problems include: o It’s just hard to know what the real profitability for each of the companies is. (Presumably they were created to fulfill a specific financial or legal purpose.) o It’s much easier for fraud to occur when no one can tell what’s going on. o Job costs aren’t properly stated so it impacts tax results. Bad filings penalties, interest, etc. not to mention ongoing audits. o If one or more partners or stockholders withdraws, or there is a divorce, or a death, there will be a REAL mess to deal with – and it’s much worse under those stressful circumstances. o It will cost a lot to unscramble the mess. o When the results are so commingled, “the corporate veil has been pierced” so all companies are at risk if any of them are sued. o You may need to actually shut companies down, and start over with new ones (even more time and expense).
Recommendations – primarily for owners (but you can help recognize the problem!)
Get expert help – and the sooner, the better. o This type of situation turns into a very sticky, difficult‐to‐maneuver maze very quickly. o I have seen ALL of the above consequences occur. o Be sure that you are dealing with someone who is reputable, and knowledgeable.
© Info Plus Accounting (may not be used or re-printed without permission)
Page 3
