Is it necessary to have separate bank accounts for each subsidiary within an Umbrella Corp?
Was wondering if it is prudent to have separate bank accounts for different operations/functions/projects within the same umbrella corp? From the accounting side, most account software can separate each d.b.a. But is it wise to keep the monies separate for any reasons (tax, payment confusion to vendors, etc.)? Or is having more than one account a lot of unnecessary labor for the sake of keeping revenue and payment being less confused for vendors or customers?
It really depends on local tax laws, banking costs, and on what you do.
In our own case, we have 3 businesses all operating under the same tax identity and registration number but have 2 bank accounts. In reality we could have done with just 1, as our invoice numbering scheme takes care of the revenue recognition and our accounting system takes care of the cost allocation.
The reason we have 2 bank accounts is that in one business we handle client's money (we manage vacation rental properties on behalf of the owners). We take money on behalf of our clients, some of which is subsequently retained as our fees. Having client's money in a separate account keeps things clean and less confusing. It also prevents us from spending the money that is not really ours (at least not 100% of it). This also allows us to show the tax man where the money came from, which savea arguments later.
We also have a PayPal account that allows us to operate multiple currencies USD, GBP, and EURO. Clients can pay us in any of these currencies and we can convert them to our local currency (Euro) when we can take advantage of currency rates or if we need to pay suppliers in USD or GBP or Euro. It is sort of a currency hedge fund without the costs of a currency hedge fund!
Now, the important thing is that we operate in Spain, so your local conditions may differ to us. However, banking in Spain is not exactly cheap, so businesses and individuals tend to think very carefully before opening multiple accounts. If your local banking system allows you to have bank accounts at no cost or very little costs then your decision making process may be based on other issues. Ultimately local tax laws and banking costs will determine your options, but keeping things separate makes life easier.
I hope this makes sense.
You said "Umbrella Corp" so I want to clarify something first. I don't use that term anymore because I could have a consolidated group of corporations or a corporate entity that owns 100% of several LLC's. So...
If you have a situation like those I just described, go by the Legal structure and tax I'd number. If you have multiple legal entities, each should have its own bank account to properly collect its own income. If you commingle collections in any of the above scenarios, a lawyer will probably jump on you to say you are tainting the whole reason for setting up multiple entities - which should be limited liability protection.
Now, if you are operating separate business divisions under one corporation with one tax ID number, then absolutely no reason to have separate bank accounts UNLESS you're using DBA's and the bank makes you have accounts with different names (I've only seen that once and it was a while ago).
Accounting systems are very sophisticated now. It's easy enough to track separate business units as you said, but I think it's only necessary to split things up if you have separate legal requirements. So consider what I said about the structure being key and let me know if you need anything further.
When you say subsidiaries, I assume you mean corporations or LLCs owned by a parent, then each should have separate bank accounts, even if they share employees. Notwithstanding that you are going to file a consolidated tax return for them, they should have a separate general business account. If you do share employees between the companies then I would advise you have a management agreement between the parent company and each subsidiary to cover the cost of the employees and place them on a single payroll. There are two primary reasons for having a subsidiary as opposed to a division of a company. A subsidiary will limit liability to the parent corporation and usually operates a distinct kind of business either geographically (foreign subsidiary or in another state) or operates a distinct business from other business operations. e.g. Airplane parts manufacturer and other business is food distribution, or a series of real estate investments with idea of keeping them as independent operations.
If you co-mingle funds and employees and fail to operate the subs as independent entities, then you will lose the limited liability that each sub would otherwise have in protecting both the parent and the other subs.
A good CPA can assist you in structuring your subs, bank accounts and payrolls so you can keep each subs independence and limited liability as well as maximize your tax benefits from the structure you created.
I have managed as well as acted as legal counsel for many private companies with multiple subsidiaries and helped them maintain the independence of the subs, whether they are multiple real estate ventures or multiple businesses under a single entity's control.
Firstly are you talking about bank accounts or accounts within the balance sheet of the Umbrella Company?
The purpose of an Umbrella Company is just that; to cover all companies registered under it, in effect a holding company, just not owned by you.
There is no reason why you cant have the Umbrella Company name using the "Trading as" style for all the other companies within it. To that end you would only need one bank account for the client company to pay in to; however you would have to split that money up in to the (effectively) subsidiary companies within the Group.
All you need to do is to put on the instructions for payment quoted with your payment terms, the details of the bank account you are using as, what in effect is a "Collections Account" for the other subsidiaries and ask the remitter to quote their account number on the remittance advice. Once you have received payment electronically or cash (including cheques), how you allocate it to the various Sales Ledgers for each of the subsidiary companies is really up to you.
Providing you have a sound audit-trail, and record the payments in a cash-book and remittance file, together with any Journal or references your computer generates when applying entries through the ledgers, then that should be sufficient.
I would take further advice on the matter as some of the accountancy can be a bit tricky as you will have to create a consolidated Balance Sheet, and Profit and Loss Account, when you file at Companies House.
The Credit Consultancy Limited.
In my view it is good, becoz it will give you clear cut view of accounting, profit and loss, your vendor management, your tax criteria. It will make your subsidiary business visibility towards your procurement and expenses.
Thanks to all who replied! Wisdom shared is appreciated. Sounds like so long as I have my details in order and communicating correctly with each transaction, one bank account will do.
In developing Economies where a Bank will wake up one morning and tell you they are bankrupt, it helps not to put all your eggs in one basket.
But if you love overdraft fees, extra paperwork, higher accounting fees, and extra hassle I would go ahead and do it. The more the merrier.
I would. To me it is important to be able to follow the money (i.e. cost, expenses, and profit) and be able to redistribute funds as needed based on day to day operations. This will also allow the company to have an overview if restructuring is necessary. If what is currently in place works, keep it.