Transactions between associated companies

[unit156]

I'm not really sure what question I'm asking but I'll word my problem to the best of my ability and maybe someone can help me understand it enough to be able to approach an attorney with the right informaiton.

I started an LLC (ABC) with two other equal parnters. One of the partners, J, owns his own company (XYZ). We recently agreed that ABC would purchase advertising leads from XYZ to take advantage of XYZ's volume discount.

For some reason, although I've been taking care of the invoices and books for ABC up to this point, J wants to pay XYZ invoices directly via ACH from ABC's deposit account himself. I'm not at all comfortable with this but I can't articulate why. It just doesn't seem right in my mind for J, who has ownership interest in both companies, to be transferring funds from one company to the other. I'm not a legal or tax expert, so I don't have a good explanation for my concern, nor do I know for sure if my concern is justified.

My question: Is my concern justified? What payment types are acceptable between two separate companies, related only by one owner? Is it ok from a legal and tax stand point for J, who has ownership interest in both companies, to be transferring funds from one company to the other to pay invoices? Would a check be ok? Manual deposit? I want to be able to provide a rational explanation on how he should or should not be handling ABC company funds.

Many Thanks!

[Business Attorney]

If you are satisfied with the transaction itself, there is nothing wrong merely because the parties are related. However, since you are feeling uncomfortable, you may not as happy with the transaction as you indicate that you are.

Likewise, there is nothing inherently wrong with having expedited payments via ACH. However, whether there are written checks or electronic transfers, there should be adequate checks and balances to insure that ABC is only billed for, and pays, invoices that are in line with its agreement with XYZ. It sounds like there may not be sufficient oversight in the procedure you described.

[Evan]

I agree with David. Whether you did an ATM withdrawal of the cash and remitted that as payment, initiated an ACH transfer, EFT, paid via credit card, wire transfer, or by check -- it's all acceptable.

[unit156]

Thanks Business Attorney and Evan for your replies!

I am not comfortable with the transaction because I have a small suspicion that J might be looking for ways to personally pocket the money. I have no proof though, so I don't want to just come out and say that. I wish he would just let one person pay the bills (me), especially since I don't have ownership interest in XYZ. I'm looking for some legal explanations to offer to him to support my preferences.

A transfer or ACH makes it hard for me to verify he isn't just depositing it into a personal account of his, instead of to his business. It is my understanding that the IRS and/or business regulators might also want to identify transactions where business funds are going into personal accounts. Are there certain types of transactions that raise red flags with them?

My banker told me there is nothing wrong with our two companies doing business together, but that if its anything other than a check, it may invite IRS problems, i.e., if XYZ is audited, then ABC could be automatically subject to audit. He thinks writing checks create more of an 'arms length' transaction to avoid the IRS connection or something to that effect.

I prefer a check because I can see whom it is written to and make sure he is paying XYZ, and not himself. I'm looking for reasons to support my preference, so he doesn't see me as being difficult and bossy. I am also concerned about things that might dilute the liability protection of our LLC. I was hoping to get some elaboration on these issues from others in the know, as it is a lot of new info for me to digest at this point, and I'm not sure at what point the problem warrants ABC or myself retaining an attorney.

Again, thanks all for your thoughtful responses!

[Evan]

There isn't any legal reason that will support it. Perhaps you can state that you like having a paper trail in place and are trying to minimize all the hands in the pot.

Partnerships can have some pretty fun accounting... :)