Reporting International Subsidiary Costs for LLC


E

explorart

Hello everyone. I have a situation I need help with: Company A is a US LLC
taxed as a partnership. Company A also has a 100% ownership interest in
company B, which is a foreign corporation (Venezuela) and which functions as
a subsidiary of company A. Company B serves as a production unit of the
products sold by company A - all revenues from these products are obtained
by company A only. Now, when creating a cash flow projection for company A,
how is the best method of recognizing the operating expenses of company B?
That is, since company B is not obtaining revenues, their operating costs
must be covered by company A. Here are some options I' considering:

1. Can these 2 companies work as separate units so that Company B simply
invoices company A for the work in creating these products? (even though
company A owns 100% of company B)? If this is the case then the operating
costs associated with company B would be recognized as costs of goods sold
in company's A cash flow and income statement.

2. I guess another option is to consolidate expenses for both companies, but
I don't think this would be appropriate since company A is an LLC and can
not present consolidated financial statements.

3. Yet a third option would be to add a line in Fixed Expenses for company A
called "Misc. Subsidiary Costs" or something like that and include here all
costs associated with Company's B operations. For tax purposes company B
would invoice company A for these costs. The benefit of doing this is that
we could better separate general administrative expenses of company B from
production costs. In option 1 above, the cost of goods sold would be
inflated with these overhead costs while in option 3 these overhead costs
would not be included as cost of goods sold. This would improve the company
gross margins while the total expenses would remain the same.

Any thoughts, comments, or opinions would be greatly appreciated.
Thank you NLLD.
 
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D

David Jensen

Hello everyone. I have a situation I need help with: Company A is a US LLC
taxed as a partnership. Company A also has a 100% ownership interest in
company B, which is a foreign corporation (Venezuela) and which functions as
a subsidiary of company A. Company B serves as a production unit of the
products sold by company A - all revenues from these products are obtained
by company A only. Now, when creating a cash flow projection for company A,
how is the best method of recognizing the operating expenses of company B?
That is, since company B is not obtaining revenues, their operating costs
must be covered by company A. Here are some options I' considering:

1. Can these 2 companies work as separate units so that Company B simply
invoices company A for the work in creating these products? (even though
company A owns 100% of company B)? If this is the case then the operating
costs associated with company B would be recognized as costs of goods sold
in company's A cash flow and income statement.
Not only can it, but generally Company B must invoice Company A for the
fair market value of the product being purchased by A. Costs of Company
A that can be charged to Company B for management expenses or management
overhead are limited by law and treaty. Your accountant or lawyer will
be able to give you accurate information based on the specific details
of your company.
2. I guess another option is to consolidate expenses for both companies, but
I don't think this would be appropriate since company A is an LLC and can
not present consolidated financial statements.
You have to have a complete set of books for each company for the taxing
authorities. You will do the consolidations later.
3. Yet a third option would be to add a line in Fixed Expenses for company A
called "Misc. Subsidiary Costs" or something like that and include here all
costs associated with Company's B operations. For tax purposes company B
would invoice company A for these costs. The benefit of doing this is that
we could better separate general administrative expenses of company B from
production costs. In option 1 above, the cost of goods sold would be
inflated with these overhead costs while in option 3 these overhead costs
would not be included as cost of goods sold. This would improve the company
gross margins while the total expenses would remain the same.
Since you must invoice at fair market value for tax purposes, why bother
with a separate, and possibly misleading alternative for the
LLC/partnership.
 
E

explorart

Thank you David, A few thoughts:

Not only can it, but generally Company B must invoice Company A for the
fair market value of the product being purchased by A. Costs of Company
A that can be charged to Company B for management expenses or management
overhead are limited by law and treaty. Your accountant or lawyer will
be able to give you accurate information based on the specific details
of your company.
There are three complicated issues about this. First, there are significant
periods of time when company B is in development without a product to offer
to company A. During this time co B can not charge a fair market value for
any product, yet company A still has to cover all operating expenses. Thus,
can company B charhe for development overhead to company A? (remember that
co A is the US LLC parent company).

The second issue is that if company B simply charges company A a fair market
value for the products so that co B can obtain enough revenues to maintain
operations, the cost of goods sold would be artificially inflated since it
would include significant overhead/management costs of co B. I know this is
what is expected when you purchase a product (company B sells the product
for enough to cover overhead expenses) but in this case doing so would make
the value of goods sold significantly higher than it should be.

A final issue is that in our case we are talking about creative products
that company A has the copyright for and company B simply conducts the
production. More specifically for example, company A has the rights for a
particularly documentary that company A wants to shoot in Brazil. Since
company b is in south america, company b conducts the entire production as a
subcontractor for company A. It would be completely fine to simply charge
for this services to company A, but what we are trying to do is find a way
to charge for overhead and development costs that are independent or not
related to any particulart product.

So this would be the scenario:

What if:
1. Company B charges for any production work performed. This would be
included in company A expenses as costs of products sold.
2. Company B charges a development and overhead fee to co A. This would be
included in company A expenses as R&D under general admin costs.

Would this work?
Thanks
 
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D

David Jensen

Thank you David, A few thoughts:



There are three complicated issues about this. First, there are significant
periods of time when company B is in development without a product to offer
to company A. During this time co B can not charge a fair market value for
any product, yet company A still has to cover all operating expenses. Thus,
can company B charhe for development overhead to company A? (remember that
co A is the US LLC parent company).
That is an investment by A LLC in B Corp.
The second issue is that if company B simply charges company A a fair market
value for the products so that co B can obtain enough revenues to maintain
operations, the cost of goods sold would be artificially inflated since it
would include significant overhead/management costs of co B. I know this is
what is expected when you purchase a product (company B sells the product
for enough to cover overhead expenses) but in this case doing so would make
the value of goods sold significantly higher than it should be.
Fair market value is not determined by the costs of the company, but by
the going market rate -- what is the product being sold for in a
competitive market, or what would it be sold for, based on similar
items.
A final issue is that in our case we are talking about creative products
that company A has the copyright for and company B simply conducts the
production. More specifically for example, company A has the rights for a
particularly documentary that company A wants to shoot in Brazil. Since
company b is in south america, company b conducts the entire production as a
subcontractor for company A. It would be completely fine to simply charge
for this services to company A, but what we are trying to do is find a way
to charge for overhead and development costs that are independent or not
related to any particulart product.
I understand. There is a going rate for such work and the tax
authorities will want this to be treated as such. Again, an accountant
with international expertise or contacts will have to give you the
answer.
So this would be the scenario:

What if:
1. Company B charges for any production work performed. This would be
included in company A expenses as costs of products sold.
2. Company B charges a development and overhead fee to co A. This would be
included in company A expenses as R&D under general admin costs.

Would this work?
Not for financial accounting. The right way to book costs for contracted
services is to include all of those costs in the cost of goods sold, not
under general administrative. When you do your job cost accounting (this
is not financial accounting, but managerial) then it is appropriate to
re-allocate costs.

....
 

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