Established LLC/S Corp investing in a new LLC

I am a 50% partner in an LLC/S Corp. My partner and I want to establish a second business (unrelated to first) first as an investment (hopefully for tax benefits) and then as a potential source of income. I understand we can form a new LLC and name the S Corp a partner and another person a (percentage) partner. The S Corp could then ‘invest’ in the new LLC and run it separately, but be a part of its gains and losses for tax purposes.

At the point of establishing the new LLC, does the established LLC/S Corp simply transfer money into the new LLC as the initial investment — for the new LLC to purchase inventory or the like to get started? Is the investment into the new LLC then tax deductible for the established LLC?

Thank you in advance.

Answer

The established LLC/S Corp would invest the money in the new LLC and either take stock (thus the investment would be a capital contribution) or take back a promissory note (in which case it would be a loan).

The mere investment of money into the LLC is not a taxable event for either party.

When the new LLC spends money and incurs business expenses in excess of its revenue (i.e. recognizes a loss), then that loss “passes through” to the owners.

In this case, at least one of the owners/members is the LLC/S Corp. So the LLC/S Corp would take the deduction.

But again, the deduction would not be taken until the new LLC actually posts a loss by having currently recognizable expenses that exceed revenue.

Think about when you individually purchase a stock. When you buy $10,000 worth of stock, you don’t get a deduction. Same here–when the established LLC invests $10,000 in the new LLC, it doesn’t take a deduction. Not until the new LLC posts a loss (or it goes bankrupt and cannot pay back the capital contribution and/or loan), does the investor get a deduction.

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