Multiple Entities - Mutiple costs

Don't misunderstand me here, setting up multiple entities can be a very effective and beneficial way to conduct business, especially from an asset protection point of view. However what is often overlooked is the true cost associated with doing so.

To run multiple trading entities properly requires a lot of duplication. For example bank accounts, supplier accounts, company accounting data files all need to be duplicated.

These are some of the basic expenses that business owners are prepared to accept when they restructuring their business. What business owners often overlook is some of the not so obvious costs they will incur if they are not strictly disciplined in running the entities as true separate entities.

The most common overlooked cost that I see, is the administrative cost to correct supplier invoices paid out of the wrong entity. Take for example the case where employees are issued company credit cards. Usually employees are only issued one company credit card, even though they may do work or incur costs for multiple entities. When the employee is at the cash register of a store, the last thing on their mind is "Am I purchasing this item with the correct entities funds". So they pay for the item with the business credit card in their wallet.

If the credit card was in ABC Pty Ltd's name and the item purchased was for XYZ Pty Ltd, then we start to analyse the true cost of the error.

1. An entry needs to be generated in ABC's books to record that XYZ now owes them money.
2. An entry then needs to be generated in XYZ's book to record the purchase of the item and to record the liability to ABC.
3. Intercompany loan accounts between the entities needs to be reconciled.

To make things even worse, in Australia we have tax legislation known as division 7A which legislates circumstances where interest needs to be charged/paid on intercompany loans.

It now becomes obvious how a simple oversight can be an extremely costly exercise.

The above is only a basic example, imagine the cost to the business if they then return the goods and the funds are then refunded.

Shane Holbeck
www.accountix.com.au