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:
- 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.
- 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.
- 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.