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Jennifer W's headshot
Jennifer W Book keeper

LLC divides into 3 entities; how do you divide retained earnings?

Asked on Sept. 20, 2022

I am a bookkeeper who recently took on a client that is separating an LLC into three.

They were: Master LLC with a dba of XYZ

They are now:

  • Master LLC owns - XYZ LLC 100%;
  • A split off service ABC LLC 50% owned by Master LLC.        

Is there a single, right way to divide out the original LLC’s retained earnings/profit into the new companies? Or is this at the decision or will of the company owner?

I feel like I should know the basics before I enter into a discussion with the business owner about how to proceed.        

Answers

Wayne Spivak's headshot
Wayne Spivak President & CFO • September 20, 2022

If I understand your question, you created two new LLC’s on June 9th, registered with the Secretary of State of your State.

- XYZ is 100% owned by Master LLC.

- While ABC is only 50%.

As new companies, the initial transactions would be some type of cash, property or services which matches the percentage of ownership.

If Master seeded the bank account for XYZ, the entry would be:

Cash $xxx

          Equity-Master $xxx

If in addition to cash, Master paid for legal fees for the setup, the opening entries would be instead:

Cash $xxx

Legal Fees $xxx

          Equity-Master $xxx

So, as you see, earnings and profits do not go over. All sales and other transactions would start to be recorded, in this example, as of Jun 9th.

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