Reporting International Subsidiary Costs for LLC

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.

  1. 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.

  2. 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.

Reply to
explorart
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On Mon, 29 Aug 2005 21:44:16 GMT, in alt.accounting "explorart" wrote in :

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.

You have to have a complete set of books for each company for the taxing authorities. You will do the consolidations later.

Since you must invoice at fair market value for tax purposes, why bother with a separate, and possibly misleading alternative for the LLC/partnership.

Reply to
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).

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

Reply to
explorart

On Tue, 30 Aug 2005 13:15:16 GMT, in alt.accounting "explorart" wrote in :

That is an investment by A LLC in B Corp.

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.

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.

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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Reply to
David Jensen

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