Q&A icon

Startup Q&A

Back to questions

What is a good way of structuring an inter-company loan?

Vanessa Kruze Kruze Consulting

Vanessa Kruze

CEO and Founder of Kruze Consulting

Table of contents

When it comes to structuring money transfers from a Delaware C-Corp to its international subsidiary or parent company, you have 3 options:

1) With invoices/bills (AP/AR): can be administratively costly, need to determine “market price” so the transaction is considered at “arms length.” See more here with Transfer Pricing.

2) As an Intercompany Loan (Currrent Asset/Liability): simple transfers, low-interest rate at AFR (Applicable Federal Rate). This is my top choice in terms of keeping legal, bookkeeping, and tax easy and streamlined.

3) By purchasing Equity: very costly from a tax and admin perspective, since we have to get the lawyers/contracts involved. Once distributions need to be made, they are taxed at a high rate (~15-40%). In my opinion, its the worst option.

Furthermore, you’ll want to set up the two companies for easy reporting consolidation. Here are a few helpful tips:

  • Both entities should use QBO

  • Both entities should use the exact same Chart of Accounts. Numbering your accounts really helps too!

  • When making inter-company transfers, both entities should book the transaction as a mirrored outflow/inflow. For example, if the US sends $100K to China, then the US Company books this as “Account 3456: Intercompany Loan = $100,000) and the Chinese entity books this as “Account 3456: Intercompany Loan = -NEGATIVE $100,000). Hence +100K - 100K = $0 upon consolidation. Looks a little funny when the books stand alone, as you might have a negative Asset Account. Do not be afraid, you’re doing it right. This is known as account elimination.

  • Be sure to use Oanda.com for Foreign Exchange difference

Of course, your situation is unique. Be sure to work with your tax and legal professionals to make sure you’ve kept everything kosher, legal, and well documented. Hope this helps!

Interested in learning about the March 2020 COVID stimulus? Read our CARES Act for Startups page.

Kruze Consulting is a leading accounting firm working with seed and venture funded Delaware C-Corps. Funded startups choose Kruze Consulting’s team of CPAs, bookkeepers, CFOs, former IRS tax auditors, and venture experts. In addition to running the books, Kruze does tax, finance, and HR. Contact Kruze today!

READY TO CONNECT FOR A FREE CONSULTATION?

We are the experts at helping seed/VC-backed Delaware C-Corps with their accounting and finances!


Talk with a real accountant, not a generic salesperson!

 Kruze Consulting
Scott Orn
 Kruze Consulting
Alex Janeck
 Kruze Consulting
Edith Silva

Help us get in touch

Enter your name
Enter Company name
Enter Phone number
Enter Email
Enter Message
   
  Talk to a leading startup CPA