Multiple LLCs and an S Corp: Separate Books and Transfers

Do I need separate books for each company, or can one file hold them all?

Keep a complete, separate set of books for each business. Publication 583 says an owner of more than one business must keep a complete and separate set of books and records for each. Giving each company its own bank accounts, balance sheet and profit and loss is the usual way to do that, because each can have its own owners, debts, employees and return. The IRS accepts any recordkeeping system that clearly shows income and expenses. When an S corporation completes Schedule L, the Form 1120-S instructions say the balance sheet should agree with its books and records.

No tax rule sets a number of software files or subscriptions. Test it this way: can each company produce its own reports without the others? If so, one combined file can work; if not, that company needs its own. For software, see when accounting software stops being enough and setup for an S corporation.

A case is not simple when:

• One company has an outside partner, so its books must support that partner's K-1.
• Money moves between the companies and nobody wrote down what it was.
• One company pays, or employs, the staff of another.
• One bank account serves more than one company, or personal and company money are mixed. See fixing commingled funds.

Gather first: an ownership chart (each company, its owners and their shares); each company's EIN letter and formation papers; every bank and card statement; loan papers and any agreement between the companies; and the latest return and K-1s for each.

If the second or third case above is yours, the past entries usually need sorting before the returns are prepared; the last section covers that.

Which of my companies files its own return?

Each company files according to how it is taxed, not how many you own.

Elections and membership changes move an entity between rows. Form 2553 (S status) is generally filed within 2 months and 15 days after the S year begins. Form 8832 can take effect 75 days before to 12 months after filing, and is a deemed transfer of the LLC's assets (Form 8832). Adding or losing a member also changes an LLC's default row (IRS).

State returns follow their own rules. A one-owner LLC with no return of its own is still a separate employer, covered next. For whether to own a second business directly, through a company or in a new LLC, and what each choice files, see running more than one business.

Which company's name and EIN go on payroll?

The company that employs the worker, under its own EIN. Publication 15 says a worker is generally your employee if you have the right to control what is done and how, and tells employers to use their own EIN on everything sent to the IRS and the Social Security Administration.

A one-owner LLC with no income tax return is still the employer, under its own EIN. The IRS treats a single-member LLC as a separate entity for employment tax, with its own name and EIN for wages, and says it needs an EIN if it has employees. On a Form W-9, the same LLC gives its owner's name and number.

The trap is running one company's payroll under the owner's number or another company's EIN. If that happened, see fixing a payroll mistake. State payroll accounts are set up state by state.

One company receives the deposits and another pays the payroll: how is that recorded?

Each company's books show its own income and its own costs, wages included. The company whose bank account carried the other's money records a balance owed, not income or expense, and each side shows the other as "due from" (a receivable) or "due to" (a payable).

At every month-end, A's "due from B" must equal B's "due to A"; if not, an entry is missing on one side. Settle balances in cash on a schedule and keep the dates: unpaid amounts owed between related taxpayers can delay the payer's deduction until the payee includes the amount in income (26 U.S.C. 267), depending on the payee's accounting method. For the payroll entry itself, see payroll journal entries.

Who writes the check does not by itself decide who the employer is. The person the work is done for is the employer, except that when that person does not control payment of the wages, the person who does is treated as the employer for withholding (26 U.S.C. 3401(d)). Related corporations that employ the same individual at the same time can use a common paymaster; each deducts only its own part of the wages, and only if it reimburses the paymaster (Publication 15-A). That rule is about a shared worker, not one company funding another's staff, and the publication does not say how it applies to LLCs.

A company that is not the employer can still owe the employer's withholding. Paying an employer's workers directly makes the payer liable for the taxes that should have been withheld from those wages, plus interest (26 U.S.C. 3505(a)). Supplying funds for payroll, with actual knowledge that the employer will not or cannot pay over the withheld taxes, makes the payer liable for the unpaid taxes, up to 25% of the funds supplied (section 3505(b)). The employer still files its own payroll returns, and the IRS manual says suit against the payer comes within 10 years after the tax is assessed against the employer (IRM 5.1.24.4.5.3). An owner or officer who decides which bills get paid can also be personally liable for unpaid withheld taxes (trust fund recovery penalty). So whether regular funding of another company's payroll holds up depends on the facts; settle who the employer is, and how the funding is documented, with a professional before the next payroll run.

How do I record money moving between my companies?

Decide what the money is when it moves, and book both sides the same way. The label has to match what actually happened: a note written afterward does not by itself turn an earlier transfer into a loan.

Equipment or property bought from another company is generally an asset, not an expense (26 CFR 1.263(a)-2). Related-party sales have their own rules: a loss can be disallowed (26 U.S.C. 267(a)(1)), and gain on depreciable property can be ordinary income (26 U.S.C. 1239). A service charge to another taxpayer that is not a corporation can require the payer to file Form 1099-NEC once payments reach $2,000 in a year, due January 31 after that year (IRS). Have each reviewed before the returns are prepared.

Check first who owns each company for income tax. A one-owner LLC with no election is part of its owner (26 CFR 301.7701-2(a); IRS). Money between two such LLCs with the same owner, or between an S corporation and its own one-owner LLC, is an internal movement for income tax, though the books can still keep a balance by company. If you own both the LLC and the S corporation, money between them is money between you and the S corporation: a shareholder loan, a contribution, a distribution, or a genuine payment for rent, services or a cost, which stays what it is (see shareholder loans).

Two companies with no ownership in each other, such as an S corporation and an LLC the same person owns with partners, generally are not contributing to or distributing to each other. Money between them is usually a loan, a payment for goods or services, a reimbursement of a cost one paid for the other, or a distribution to the owner followed by a contribution from the owner.

With more than one shareholder, distributions should follow share ownership: an S corporation may have one class of stock, meaning identical distribution rights, and a payment that differs in timing or amount is given appropriate tax effect (26 CFR 1.1361-1(l)). Money sent to one shareholder's other company, not shared in proportion, needs sorting out before it is booked as a distribution; see S corporation bookkeeping.

A loan has to be a real one. For bad-debt purposes, a bona fide debt is a valid and enforceable obligation to pay a fixed or determinable sum, and a contribution to capital is not a debt (26 CFR 1.166-1(c)). An S corporation's loans-from-shareholders figure covers debt owed directly to a shareholder, not intercompany debt (Form 1120-S instructions).

Interest-free or low-interest loans between a corporation and a shareholder, directly or indirectly, can fall under the below-market loan rules, which have exceptions (26 U.S.C. 7872). Whether a loan to the shareholder's other company counts is a question for a professional. For an owner's own loan, see shareholder loans and borrowing from your own corporation.

Is a repayment of loan principal tax-free?

Repaying principal on a genuine loan returns the lender's own money. The open questions are whether the loan was genuine and, when the lender is the owner, how much loan basis the owner has.

• A transfer that was never a loan does not meet the definition above. It is a contribution, a distribution or something else on the return, and a repayment of it is treated accordingly.
• An owner's own loan to their S corporation: when losses have reduced the owner's loan basis, a repayment, even a partial one, can create taxable gain, and an owner who receives a repayment from an S corporation files Form 7203 (instructions). See shareholder loans.
• A loan from the owner's other company is generally not the owner's own loan: the Form 7203 loan section is for money the shareholder personally loaned, and the Form 1120-S instructions leave intercompany debt out of the shareholder-loan figure. A one-owner LLC with no election is the case to check, because for income tax its activity is the owner's (see above), so a loan from it may be the owner's own. Settle which one a past transfer was before a repayment is made.

How does a partly owned LLC show up in my S corporation's books?

A partly owned LLC appears in the books of whichever company holds the interest as an investment (an asset), not as the LLC's cash, sales or expenses. Check the ownership chart first: an interest the owner holds personally appears on the owner's return and in none of the S corporation's books.

If the S corporation holds an interest in an LLC taxed as a partnership (the default for two or more members), track four things. An LLC that elected corporate treatment sends no partnership K-1, so confirm its classification first (IRS).

1. What went in. A contribution adds to the investment. A loan is a separate receivable.
2. The yearly K-1. Ordinary income or loss from the partnership goes on Form 1120-S, line 5, with a statement naming the partnership and its EIN. Rental, portfolio and other separately stated items go to Schedules K and K-1 or Form 8825 (Form 1120-S instructions).
3. What came out. Distributions reduce the investment.
4. Basis. A partner's basis rises with the partner's contributions and share of income, and falls with distributions and share of losses (Publication 541).

The K-1 comes from the LLC's return, which can be finished after the S corporation's books close, so plan an adjusting entry. For capital accounts inside the LLC, see partner capital accounts.

What records do I keep for each company, and for how long?

Keep a separate folder for each company. Retention follows the period in which a return can still be examined or amended (IRS).

A corporation should also keep minutes of directors' meetings (Publication 583). The longer periods are in how long to keep business records.

Example

These examples are illustrative; amounts are in US dollars.

Three companies, three sets of books

An owner has an S corporation, a rental LLC she owns alone, and a 50 percent stake in a shared LLC with an outside partner. The S corporation holds the 50 percent stake, and no LLC has elected corporate status. That makes three sets of books. The S corporation files Form 1120-S and reports its K-1 income from the shared LLC. The rental LLC is reported on her Schedule E. The shared LLC files Form 1065 and sends a K-1 to the S corporation and to the partner. Any of the three with employees runs payroll under its own EIN.

The S corporation pays an LLC's payroll

Her S corporation, which she owns alone, covers US$30,000 a month of wages for the employees of an LLC she owns alone, with no election. The LLC is the employer and files payroll returns under its own EIN. The S corporation records US$30,000 a month as due from the LLC until repaid. The LLC records US$30,000 a month of wage expense and the same amount owed to the S corporation. After three months, both sets of books show US$90,000, one as due from and one as due to. Because she owns the LLC, the IRS generally treats these payments as money between her and the S corporation, so the balance is a shareholder loan or a distribution, unless it is a genuine payment for something. A balance that is never repaid raises the question of whether it was ever a genuine loan. If the S corporation pays the employees directly, it can also be liable for the taxes required to be withheld from their wages (see above).

The S corporation lends to the shared LLC

The S corporation lends the shared LLC US$20,000 on a signed note. The S corporation records a note receivable of US$20,000. The LLC records a note payable of US$20,000, a loan from a partner. When the LLC repays US$5,000 of principal, both sides drop to US$15,000. If the note charges interest, it is income to the S corporation and an expense to the LLC, though the LLC's deduction for interest it has not paid can be delayed (26 U.S.C. 267).

Different for you?

• Money moved between your companies and nobody can say who owes whom, or one company paid another's payroll, which can leave the payer owing the withheld taxes: past transfers have to be classified from what actually happened (papers, repayments, who benefited), and each company's return depends on the result. Do not create or backdate loan papers; get bookkeeping help before the returns are prepared.
• You plan to repay a transfer, or already did, and cannot show it was a loan: whether the repayment is tax-free turns on the facts above. Sort the records first with bookkeeping help.
• Payroll ran under the owner's number or another company's EIN: the filings may need correcting, and the books need the transfers sorted first. See fixing a payroll mistake and bookkeeping help.
• You are deciding whether to run a second business directly, in a new LLC or under a holding company: see running more than one business.
• You need an LLC's equity accounts, or the S corporation's own accounts, officer pay and distributions: see LLC equity accounts and S corporation bookkeeping.
• Each rental sits in its own LLC: see books for an LLC per rental property.
• Your family holds ten to thirty entities: see family office accounting across entities.
• One of the companies is Canadian: see books for a Canadian company and its US company.