Cash Transfers Between Companys

[ConnorandCo]

I have a situation where an individual owns three completely separate companies. They are all "S" corps. One company essentially earns all income for the three companies, and then transfers money to the other two companies to cover their bills. As of now I have been expensing transfers out of the account, and accounting for transfers in as income to the receiving company. No A/R or A/P. Any suggestions as to whether this is acceptable?

[kathyc2]

If I'm understanding what you are saying, definitely not acceptable. Unless non-profitable companies are selling product/providing services to profitable company all cash transfers should be contained to balance sheet and have no effect on income statement.

Are you saying that non-profitable companies have no outside sources of revenue? Or, that they have other revenues but not enough to cover expenses? If they have no other sources of revenue why are they a separate corp?

[ConnorandCo]

Yes, one of the companies has no revenue at all, only transfers in from one of the other companies. It is very strange. This company only has payroll.

[kathyc2]

Yes, one of the companies has no revenue at all, only transfers in from one of the other companies. It is very strange. This company only has payroll.

So, the only transactions the company has are payroll expenses? Are the employees that are running through this company actually performing services for the profitable company? Is it possible this company was set up for SUTA dumping?

[BHoffman]

Yes, one of the companies has no revenue at all, only transfers in from one of the other companies. It is very strange. This company only has payroll.

Client is the sole shareholder and owns 3 SCorps:

SCorp A is an operating entity, employs workers and has business activity with unrelated customers and vendors.

SCorp B provides no goods or services, and has no unrelated customers or vendors. SCorp B issues payroll checks to whom? Employees of SCorp A? What NAICS code are you using on the tax return?

SCorp C provides no goods or services, and has no unrelated customers or vendors. What NAICS code are you using on the tax return?

Is that correct?

You said that SCorp A transfers money to SCorp B and SCorp C so they can "pay their bills". You said that SCorp B has payroll expenses. What expenses does SCorp C have if it isn't operating any business?

Sounds like you might need to have a sit down with your client in order to understand what's going on. Very strange indeed and hope you post your findings. Happy hunting

[ATSMAN]

Looks like some shell companies were formed to cause "fuzzy" accounting. I would be interested in what expenses they are deducting and what portion of those may be "personal" in nature.

This one is screaming for an audit and I would not touch it. It is too hot!

[Roland Slugg]

It sounds like somebody went to a lot of trouble and a lot of expense to set up three companies where just one would probably have been all that was required. I smell a lawyer behind this.

The scheme you have described really isn't "cash transfers between companys" (sic companies) as stated in your topic heading. Instead I'm guessing that the "payroll" company provides some or all of the personnel for one or both of the other two, and that the payments that the operating company makes are, essentially, a form of management fee. This is probably all right as long as the recipient records those fees as income. Since the paying company is deducting those management service fees, the amounts will offset each other across both (or all three) corps.

It's a cumbersome way to do things, and unless I were enlightened as to the reason for this clumsy arrangement, I would be advising the shareholder to consider ending it and merging everything into one corp.

[geekgirldany]

After reading this I tried doing a little research to see if there would be a reason behind doing this. I can not find one. As Roland said, I think a lawyer was behind it. I wonder if it was for liability reasons?

[MarkCTX]

I've seen this scenario before. It is a lawyer thing to limit liability. The operating company may have a lot of assets they want to protect. The "payroll" company is just that. The idea is to keep the employees from bringing some sort of legal action against their employer and milking the company. The "cash transfers" are really management fees from the operating companies and should be recorded as management fee income by the payroll company. The operating companies record a management fee or employee leasing fee expense. Then the payroll company expenses the payroll for a net zero profit/loss.

Mark C.