Yes, an LLC can own another LLC to increase liability protection by setting up parent and subsidiary limited liability companies. In fact, there is no prohibition that prevents one LLC from owning another limited liability company. This type of legal entity is best if you have multiple assets and you are concerned about the potential liability exposure between the different assets.
Key Takeaways
- LLC stands for “limited liability company” and it is a type of legal entity that is usually formed to own and operate a business
- An LLC offers lots of benefits like liability protection, specific tax advantages, flexible management setup, etc. to a business
- There are quite a few types of LLCs available like domestic LLCs, foreign LLCs, professional LLCs, series LLCs, etc.
- An LLC can own multiple, single-member LLCs and it is known as a holding company structure
- It is possible for an LLC can serve as the master entity and own a series of LLCs
What Is An LLC?
A Limited Liability Company shortly known as LLC is a very popular business structure. In this business format, the owners are not personally liable for the company’s debts or liabilities. So, LLC is a type of hybrid entity that includes all the positive features of other business entities. One key advantage of an LLC is, you can choose how you want the IRS to tax your LLC. Other pros of LLC are –
1. There are no business debts or liabilities for the business owners
2. You have the opportunity to choose the LLC to be taxed as a partnership or as a corporation
3. LLC ensures management flexibility for the business
4. Compared to S and C Corporation, the paperwork and fees are less for LLC
Types Of LLCs
There are several types of LLCs available. They are –
A domestic LLC: This type of LLC does business in the state where it was actually formed
A foreign LLC: This type of LLC operates outside its country of origin
A professional LLC: Usually, a professional LLC provides professional services. This type of LLC requires at least one member to be licensed by the state for that particular profession. Architects, engineers, lawyers, veterinarians, etc. can form this type of LLC.
A series LLC: In this type of business structure an LLC owns several other LLCs where one LLC works as the parent LLC.
How Does An LLC Own Another LLC?
There are two ways an LLC can own another LLC:
1. An LLC can own multiple, single-member LLCs and it is known as a holding company structure
2. An LLC can serve as the master entity and own a series of LLCs
In a holding company LLC, the owner of other single members LLCs can file a single tax return which reports all income and expenses from all of the operating LLCs. So, it works as multiple business entity structures and offers business owners limited liability protection from certain claims, lawsuits, etc. On the other hand, when a single LLC serves as the master and owns other LLCs then it is considered as Series LLC. Basically, it is a form of multiple business ownership, and depending on the state law you might be able to file a single set of tax returns for the series of LLCs. However. While forming LLC series you should take caution especially if the proposed business will be active across state lines. This is because not all states recognize the Series LLC.
Advantages And Disadvantages Of An LLC Owning Another LLC
An LLC owning another LLC has both advantages and disadvantages. So, let’s check them out!
Advantages Of An LLC Owning Another LLC
The main purpose of an LLC is that your business will have to fulfill minimum requirements to operate as a business and it will be easier to manage the business. Moreover, an LLC also improves credibility with potential clients, partners, investors, or lenders. So, when you own an LLC with another LLC, you will be able to minimize the financial risk in case one of your subsidiaries gets into financial or legal trouble. For example, if one of your LLCs loses its value then it won’t affect the others in any way. Moreover, if you won lots of LLCs then you have to file a tax return for each one. However, if those LLCs are held in a series LLC structure the profits and losses of each subsidiary LLC will pass through to the parent LLC. therefore, you only have to file one tax return for all of your LLCs which is very convenient.
Disadvantages Of An LLC Owning Another LLC
So, there are some key advantages of owning an LLC with another one. However, there are some disadvantages of this type of business formation. One key con of series LLCs is multiple LLCs mean a lot more paperwork. Moreover, you have to pay additional fees because each new LLC requires a filing fee, and you’ll have to file a form for each. Moreover, each LLC must have a separate bank account, payroll, records, and tax documents. Furthermore, even if your parent LLC is protected, in case one of your subsidiaries gets sued, the protection doesn’t cover both LLCs. Therefore, if you want to use the parent-subsidiary entity structure then you have to decide which is more important for you. Is it maximizing asset protection or minimizing administrative burdens and expenses!
Why Would An LLC Own Another LLC?
Usually, business owners with many businesses often form parent LLC and subsidiaries to minimize their risks. This is because the liability protection provided by LLC can save one part of the business if the other part of the business fails. Businesses like Real estate, movie studios, and other businesses that have several ventures with different risks frequently form series LLCs. This type of business considers having a parent LLC, a subsidiary LLC to hold assets and take care of administration, and another subsidiary LLC to be in charge of operations. In this business structure, the parent LLC oversees general administrative tasks while other LLCs own and manage all the available business. This is another key reason an LLC owns another LLC.
FAQs About Can An LLC Own Another LLC
When Can An LLC Own Another LLC?
An LLC can own another LLC any time it wants. In fact, any LLC can own another LLC at any time to form a holding company, where the owner LLC is the parent entity and the subsidiary LLCs are referred to as LLC cells.
Can My LLC Have A Subsidiary?
Yes, any limited liability company can have one or more subsidiaries. Here, each business can work as an independent business or within a holding company structure. Forming LLCs can allow the business owner to avoid paying extra taxes. Moreover, the business owner doesn’t have to maintain separate finances.
Can An LLC Own 50% Of Another LLC?
Yes, an LLC can own 50% of another LLC. In fact, an LLC can own 100% or only 1% of a business. The LLC that owns another LLC is referred to as the parent LLC and it can invest in other companies.
Can One LLC Fund Another LLC?
Yes, one LLC can fund another LLC via an equity investment or a loan. While funding another LLC you should consult with a business attorney because funding another LLC involves tax and asset protection considerations.
Can An LLC Dba As Another LLC?
Yes, an LLC can DBA to do business under a second, or third name. But in this type of situation, the DBA will consider it as a part of the same LLC; there won’t be a second LLC.
Can An LLC Own An S Corporation?
No, an LLC can’t own an S corporation. This is because shareholders in an S Corporation may only be one of the following: an individual, certain trusts, or an estate.
Can An LLC Own A C Corporation?
Yes, an LLC can own a C Corporation. However, if the corporation is formed at the State level, then a natural person must be designated as the corporation’s organizer. Moreover, when an LLC owns a C corporation, the IRS will regard the C Corporation separately for federal tax purposes. Therefore, the C corporations have to file a Federal Form 1120 Corporate Net Income Tax Return each year and pay their taxes.
References:
1. https://fortunly.com/articles/can-an-llc-own-another-llc/
2. https://www.upcounsel.com/can-an-llc-own-another-llc
Last Updated on November 1, 2022 by Magalie D.
Magalie D. is a Diploma holder in Public Administration & Management from McGill University of Canada. She shares management tips here in MGTBlog when she has nothing to do and gets some free time after working in a multinational company at Toronto.
