Business owners generally want to protect their personal assets from claims, lawsuits and certain other business liabilities associated with their business. That’s why when a serial entrepreneur adds another business to his or her portfolio, forming another separate legal business entity is typically the action taken.
While owning multiple business entities is often advisable, doing so means the business owner may face additional administrative costs, professional fees, taxes, and state/local filing fees. Faced with these additional administrative burdens and costs, many business owners attempt to reduce such extra expenses and believe using a Series of Limited Liability Companies (Series LLC) or establishing an LLC as the holding company of other LLCs, S Corporations, or C Corporations is the beneficial approach.
But careful consideration should be given before proceeding because the formation of a multi-layered business entity structure will have legal, administrative, federal tax, and state tax implications. And in some instances, certain combinations of business entities may not be permissible by state statute and/or state and federal tax law. Nevertheless, exploring whether an LLC can own another business entity is a worthwhile exercise.
Can an LLC Own Another LLC?
Yes. There are two ways in which an LLC may own another LLC:
- An LLC may own multiple, single-member LLCs—this is called a holding company structure; or
- An LLC may serve as the master entity and own a series of LLC cells, should state statute offer this option.
Holding Company LLC
When an LLC is formed and is designated as the owner of other single member (operating) LLCs, the holding company LLC files a single tax return which reports all income and expenses from all of the operating LLCs. This multiple business entity structure, if properly formed and maintained, offers business owners limited liability protection from certain claims, lawsuits, and liabilities associated with owning and operating their business.
Series LLC
When a single LLC serves as the master and owns a series of LLCs, it is known as a Series LLC. Each LLC in the Series is referred to as a cell. It is important to note that the Series LLC, as a form of a multiple business ownership, is not permissible in all 50 states. In recent years, less than one-half of the 50 states have granted business owners permission to use the Series Limited Liability Company.
In the eyes of state statute, if available, a Series LLC is only one entity. This is an important distinction from the LLC holding company structure. If a Series LLC is available in the state your business is created, each LLC cell must maintain its own bank accounts, accounting records (income statement, assets and liabilities) and may have different members and managers.
Depending on your state’s rules, it may be possible to file a single set of tax returns for the series of LLCs, assuming the tax treatment (by election) and ownership structure is identical across all LLCs in the series. This ability is truly state-dependent.
The IRS is catching up with this new interest in the Series LLC multiple entity structure by issuing in 2010 Prop. Regs. Sec. 301.7701-1. In plain speak and through the proposed regulations issued in 2010, the IRS offered some guidance for business owners about how the Series LLC master and its LLC cells will soon be treated for federal tax purposes. The examples offered in the proposed regulation suggest that despite the fact that a Series LLC is a single business entity in the eyes of the State in which it is formed, the Series LLC master and each LLC cell may be treated differently when it comes to filing its respective federal tax return.
Caution should be taken if considering the formation of a Series LLC especially if the proposed business will be active across state lines, as not all states recognize the Series LLC. It may be very difficult, if not impossible, to preserve the limited liability fences within each LLC cell in states which do not recognize the Series LLC. Furthermore, very little guidance is available to business owners about how employment taxes and related employee benefit regulations would apply to the Series LLC.
Can an LLC Own an S Corporation?
No. 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. A Corporation may be owned by an LLC, however when the corporation is formed at the State level, a natural person must be designated as the corporation’s organizer.
If an LLC owns a C Corporation, it’s important to understand that the IRS will regard the C Corporation separately for federal tax purposes. The C Corporation is required to file a Federal Form 1120 Corporate Net Income Tax Return each year and pay its own taxes. Any dividends paid to its owner(s), including the LLC, would be reported as income on the LLC’s federal tax return.
Holly also founded ExitPromise.com and to date has answered more than 2,000 questions asked by business owners about starting, growing and selling a business.
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If a single-member LLC owns another single-member LLC what happens if the owner decides to shut down the original LLC but wants to keep the second one LLC open. The second LLC has significant assets on the balance sheet and creates passive income while the first LLC requires a lot of attention.
Hi Chris,
An LLC is a business entity.
When it’s ‘shut down’, its assets must be either sold or distributed (and its debts paid).
One of the LLC’s assets would be the second (profitable) LLC, if I understand you correctly.
So, if the original LLC’s debts are paid and all that’s left is the profitable LLC it owns, it could be distributed to the single owner of the LLC. I trust that’s you.
All of this takes some planning from a tax and legal perspective.
That said, if you’re the owner of both single-member LLC’s, you should be able to take ownership of the profitable LLC and shut down the other. Again, please plan with the advice of tax and legal counsel!
All the best…
I have a Holding LLC, how best do I set the structure of a vacation property i rent out short term?. I am thinking that i create a LLC single member owned by the XYZ Holding LLC. IF that is the case, do i truly not have my own personal name on the operating agreement?
Eric:
Why do you have a “Holding LLC”? What does it do for you? What does it hold? Why do you need an LLC to hold “something”?
Similarly, why do you want *another* LLC inside the first one to hold a property? What will this accomplish by having one entity holding another holding a property? What is it that you are trying to accomplish besides pay lots of filing fees to the state, and in some cases, pay extra taxes or annual fees? Why can’t the Holding LLC own the property directly?
A single-member LLC is ignored for TAX purposes, so BOTH of these entities do absolutely nothing by themselves in terms of tax protection. And as far as legal protection, An entity inside another entity doesn’t provide double the legal protection. So, perhaps there is some other strategy or reasoning I am missing. I understand why you may want a rental property owned by a (single) LLC.
As for the Operating agreement, if you are the sole owner of both these entities, then if you don’t put your personal name on the operating agreement, then whose name will go there? Probably not mine!
Dear Sean
I would suggest reading Revenue Ruling 2008-18, the Internal Revenue Service (IRS) provides guidance on the continuation of an S corporation election and the need for a new employer identification number (EIN) when an S corporation uses a tax-free reorganization to create a holding company structure.
I would also suggest that you talk with a tax attorney in order to obtain their professional opinion.
Sincerely,
Chris
Disclaimer
The information provided is not designed or intended as legal or financial advice. It is for the educational or sharing of informational purposes only. It is not a substitute for consulting with your legal or financial advisors to obtain their professional consultation.
If an LLC cannot own an S Corp, that gives me pause for a question. If I setup a Holding company and have five (5) LLCs that are owned by the Holding Company underneath it, and all of the income rolls up under the Holding company for tax purposes, can I elect for the Holding Company to be an S Corp?
I own a professional sole proprietorship as a DBA. Since in CA one cannot open up an LLC that provides professional services, is it possible to open up another LLC that does not provide professional services and have it own a dba that provides professional services?
Hi Ann,
I truly doubt that would work.
You may want to consider forming a PLLC if that’s available to business owners in California.
All the best…
If I wish to use ROBS (401k) funding to start a boutique hotel business, I must create a C-Corporation first. My question comes about how that C-Corporation can then invest in an LLC which is created to buy and own the real estate and building where the C-Corp entity would be operating. Can/should I have the LLC own the real estate to protect it from liabilities and taxes from appreciation and then lease the space to the C-Corp to run the hotel in? Am I gaining protection by splitting the entities or should I just leave the assets and the operations in the same entity – i.e. the C-Corp with the cash from the 401k Rollover investment.
Hi Ralph,
What you’ve described truly should be addressed by a business attorney who is well-versed in the ROBS rules and multiple entity structures involving real estate.
If you need such an attorney, feel free to request additional help here.
All the best…
i bought an S corp, i formed an LLC for asset protection purposes, my wife and i own the LLC, can our LLC own the S corp or do we need to set the LLC up as an S corp in order to own the S corp?
Hi Chuck,
The S corporation can not be owned by an LLC.
And an LLC is not a valid owner of an S Corporation.
If you form an S Corporation and it’s the owner (must have same shareholders) of the second, S Corporation, then you will need to file for a qualified subchapter S subsidiary, also known as a QSSS.
Hope this helps a bit…
Chuck:
A better question is “What business benefit are you hoping to obtain by having another entity own a corporation? ” The combination provides neither additional legal protection nor does it provide tax protection.
We currently are an LLC based in Georgia. We need to set up a subsidiary in Australia. What’s our best structure?