An owner runs three companies. One holds the equipment, one holds the real estate, one does the work. Money moves between them constantly, and the movement is documented by the fact that it happened.
That is the arrangement Todd Muslow CPA encounters most often with closely held businesses, and it is the one that creates the most preventable damage. He oversaw reporting across affiliated entities as Chief Accounting Officer of O’Brien Resources, LLC, which is a useful vantage point for seeing how quickly the boundaries blur.
The Structure Exists for a Reason, and the Reason Is Fragile
Separate entities get formed to isolate liability, separate an asset from an operation, admit different owners, or accommodate a lender. Each of those purposes depends on the entities actually being separate.
The formation documents do not accomplish that on their own. Behavior does. An entity that never observes its own boundaries is an entity that has an argument waiting for it.
If the operating company pays the real estate company’s insurance because the operating company happened to have cash that week, the separation just took a small hit. Do it forty times and the pattern is the fact.
Intercompany Balances Are Not the Problem
Money moving between affiliates is normal and expected. The problem is money moving without terms, without documentation, and without anyone deciding what the movement was.
Was it a loan, a capital contribution, a distribution, or payment for services? Each has different consequences, and the difference is decided by facts. Todd Muslow CPA observes that when nobody decides, the decision gets made later by someone with an interest opposed to the owner’s.
The account called Due To Affiliate that has grown for six years without a note, a rate, or a payment is the classic example. It was called a loan because it needed a label.
Pricing Between Affiliates Has to Be Defensible
If the equipment company rents to the operating company, the rate should resemble what an unrelated party would charge. If the management company charges a fee, the fee should relate to something the management company did.
Arbitrary pricing moves income between entities, and income moving between entities is exactly what draws scrutiny. This is truer still when the entities have different owners, different tax attributes, or different states.
You do not need a formal study for most closely held arrangements. You do need a written basis for the number and evidence that the number was applied consistently rather than adjusted at year end to reach a result.
Disclosure Is Not Optional
Financial reporting standards require related party transactions to be disclosed, including the nature of the relationship, a description of the transactions, and amounts due. Omitting them is a reporting failure independent of whether the transactions were appropriate.
Lenders care about this more than owners expect. A guarantee running between affiliates, or a receivable from a related company that will never be collected in cash, changes how a credit looks. Todd Muslow CPA notes that discovering such items during due diligence rather than reading them in the statements costs an owner credibility at the worst moment.
Todd Muslow CPA of Shreveport, Louisiana, is a partner of Muslow+Agnew Group, LLC and works with closely held business owners on corporate taxation, financial reporting, and consulting across multi-entity structures.
The discipline is not complicated. Separate bank accounts, written terms for anything that moves, pricing you can explain, and books that get reconciled to each other rather than to a memory.
One more habit is worth naming. Each entity should be able to produce its own financial statements that stand alone, without reference to the others. Todd Muslow CPA uses that as the working test, because an entity whose statements only make sense as part of a group is an entity that stopped being separate somewhere along the way.
This costs almost nothing when the accounts are set up correctly at the outset. It costs a great deal when it has to be constructed backward from six years of commingled activity, and the reconstruction is never as persuasive as the record would have been.
You built the structure on purpose. The records are what prove you meant it, and they can only prove it if they were kept while it was happening.