LLC owns 80% interest in another LLC

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#1
Al723  
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35
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Location:
Michigan, USA
Hello,

I have a client that owns an LLC(1) with 4 members. LLC(1) owns interest in LLC(2). The members of LLC(1) contributed, for the sake of numbers, $1 million. During the same month they transferred the $1 million to LLC(2) who used the funds to start the project.

I recorded the contributions made by the members to LLC(1) as follows:
Cash 1,000,000
Contributions member 1 250,000
Contributions member 2 250,000
Contributions member 3 250,000
Contributions member 4 250,000

My question is regarding the transfer to LLC(2). Do I record the transfer from LLC(1) to LLC(2) as an accounts receivable on the books of LLC(2)? I kind of threw it to cash for the mean time and my balance sheet looks like this:

Cash 1,000,000
Bank 100

Members Equity 1,000,100


All the assets of the work in progress is recorded under LLC(2). Contributions made by LLC(1) to LLC(2) were recorded as contributions on LLC(2) which increased LLC(2)'s basis.
How is this situation handled?
Additionally, should I keep my eye out for anything that I may need to know regarding the two LLC's?

Thank you!
 

#2
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5702
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Location:
The Land
On LLC1’s books (UT, Upper Tier), you debit “Investment in LLC2” and credit Cash.

On LLC2’s books (LT, Lower Tier), you debit Cash and credit Capital.

You always want to “reconcile” 1’s Investment account to 1’s capital account as shown each year’s K1.

Note that you adjust 1’s Investment account each year for the items shown on the K1 that 2 will issue to 1. In addition, you book up 1’s share of allocated debt as shown on the K1 issued by 2 to 1. The debt allocation, since it will be included in 1’s Investment account, but not its capital account as shown on 2’s books (and as shown on the K1 issued by 2 to 1), will be a reconciling item in your annual reconciliation.

To book up the initial debt allocation, on 1’s books you debit Investment and credit those allocated liabilities right onto 1’s books – and you treat them accordingly: R, QNR, NR. For each year thereafter, you record the change in allocated debt such that the debt actually showing on 1’s books equals the total debt allocation shown on the current year K1 that 1 received.
 

#3
Posts:
107
Joined:
21-Apr-2014 8:03am
I recommend you are sure of the 80% ownership of LLC#1 of LLC#2, and that the million was actually an investment in #2 (ie; written documents). Some, part or all may have actually been a loan to #2? Somewhere out there in #2 is a former 100% owner who is now a 20% owner? What does this LLC member have to say about it all?
 

#4
Al723  
Posts:
35
Joined:
2-Jun-2018 8:47pm
Location:
Michigan, USA
Yes, #2 is a former 100% owner who is now a 20% owner. Everything is documented by lawyers. The million includes both initial contribution and the extra funds for construction of the real estate. No loan was taken in 2017 but has been taken in 2018. I was just interest on how to record these entries on #1 before getting the K-1's to the partners.

So to my understanding, #1 pretty much has to record everything from the K-1 issued from #2 to #1. The distributions is recorded as income, the balance sheet will include the capital account balance and loan's outstanding (recourse/non-recourse). The distributions recorded as income on #1 will then be distributed on a k-1 as ordinary income to the members of #2 proportionately.

Correct me if I'm wrong.

Thank you!!!
 


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