We have a range of entities used in our family business and there are several loans between these entities. Why would this be and what do I need to be aware of?
It is a common occurrence to see the wealth accumulated by farming families undertaken through a variety of business and entity structures. Some of the decisions to do this are based on the decisions of the current generation and some decisions have been made by prior generations and then handed over or inherited.
The reasons why transactions are executed in a certain manner are specific to individual family circumstances at the time, but some of the common reasons are asset protection, managing group income tax or managing specific family dynamics.
A common outcome of having multiple entity structures is loans are created between the entities, which creates assets and liabilities held by the respective entities in their financial statements. This commonly occurs when one entity uses the money held by another entity.
Quite often the loan balances remain in the financial statements without any further consideration, especially if they were in existence prior to a subsequent generation taking over the financial affairs of the family farm.
Understanding why loans between various entities exist should be an element of your annual due diligence on the affairs of your family entities.
Depending on the legal structure, partnerships, trusts and companies are governed by various elements of legislation that need to be considered should you have any loans between entities. Some loans can attract tax considerations, which are quite often unintended or not even known about until someone asks the question.
Every family will have different reasons for why loans between entities have been created.
What's important is recognising their existence, knowing the consequences of having them and understanding how best to manage them should there be a compliance need to do so.
Loans between family entities can be easily overlooked at your annual review, however this approach may have unexpected consequences. To avoid any potential exposures you may have on this issue, speak with your advisers.
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