What is the correct way to record the ownership of a portion of one LLC by another LLC? Are funds transferred from the parent LLC to the child LLC (or vice versa) treated as Partner Loans, Intercompany transactions, member contributions & draws, or what?

asked 21 Jan '10, 17:41

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Steve 2
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It depends on how the LLC has elected to be taxed. I'll assume that it will be taxed as a partnership since this is the default.

When an LLC files it's tax return the LLC owners get issued K-1s to show their share of ownership in an LLC. It matters not whether the owner is an individual or another LLC. The ownership and the related changes as owners come and go should be recorded in a ledger similar to a stock ledger for a corporation.

Funds that are transferred are recorded in accordance with the intention of the transfer. If I loan my LLC money it would be recorded as a loan WITH THE APPROPRIATE LOAN DOCs (NOTE: The IRS is cracking down on owner loans that are not properly recorded). If I contribute money to an LLC it gets recorded as a capital contribution. If one company loans a related company money it would be recorded as an intercompany loan.

You have to look FIRST to the nature of the transaction and less to the who the parties are.

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answered 22 Jan '10, 20:47

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EAgent
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I must have been a little tired when I posted this question. I should have said ownership of an LLC by an S-Corp. Does this make any difference?

(22 Jan '10, 20:57) Steve 2

Maybe - generally I think an S Corp can own an LLC. There are restrictions on who can be S Corp owners and there are tax shelter issues when more than 20% (I THINK that's the right percentage) of income escapes U. S. Taxation.

I'd have to read the rules to be sure and with tax season here it could be a while before I get to that - sorry.

(23 Jan '10, 18:34) EAgent

A S-Corporation can own a LLC (a LLC can not be an owner in a S Corp). The initial funds should be treated as members' capital in the same manner as the other members. Additional funds can be treated as capital (members contributions), loans or intercompany transactions under tax law. As a practical matter, if there are other members as your questions indicates, intercompany payables are not as "clean" as the other classifications. The funds should be contributions if there is a capital call, with every member making a contribution or their capital being affected if not. The other treatment is loans with properly executed loan documents. If there is a question when money is paid back there is proper documentation. With intercompany due to/due from transactions the priority to repay is not as clear and disputes may occur. EAgent is right the IRS is looking at loan documentation and if the members basis for taking losses wil be determined by the treatment of the funds.

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answered 26 Jan '10, 14:48

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PStampley
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Asked: 21 Jan '10, 17:41

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Last updated: 26 Jan '10, 14:48