An LLC is a limited liability company that is given personal liability protection of a corporation with the pass-through taxation of a sole proprietorship or partnership. After setting up an LLC, it is possible to create a subsidiary LLC for an additional business and have it operate as a child of the parent company you’re operating. Most people do not even know that this is an option, and if they do, aren’t sure where or not this is even legal.
Whether this sort of structure is a good idea for your business depends on a few factors, but specifically the risks your business is exposed to. It also depends on your willingness to take on additional administrative tasks.
How Does an LLC Work?
When you form an LLC, you are utilizing a simple business structure that offers a way to avoid personal liability. This includes protection for personal assets, in case your business is sued. LLCs can be owned by one person, two people, or more people. These people are known as “members” of the LLC. When an LLC is owned by only one member, it is known as a single-member LLC. An LLC with more than one owner is a multi-member LLC.
Can an LLC Own Another LLC?
When it comes to one LLC owning another, it is legal. An LLC is allowed to be an owner of another LLC. There are not many restrictions on who can be an LLC member, which makes it different from an S-corp. LLC members can either be individuals or business entities, such as corporations or other LLCs. It is also possible to form a single-member LLC whose only owner is another LLC.
How Does it Work?
For example, if you own a condo yourself, you will be fully liable should something occur while renting it out, or in general related to this property. This means that your personal assets are at risk.
If you decide to use an LLC to buy this same condo, you will be shielded from personal liability, but the condo will be exposed to liabilities of any other properties that you own.
In this case, you can create a parent LLC, to own a separate LLC for each unit. Then, if someone is injured, or something else occurs with one of the properties, only that property is at risk. The parent LLC and the other LLC, along with your personal property will be safe from any liability associated with the condo.
Why Would an LLC Own Another LLC?
There are many reasons that one LLC would own another LLC, The main reason you might see an LLC owns another LLC is to avoid risk and liability. Business owners who have several lines of business often form a parent LLC and subsidiaries to minimize overall risks. LLCs provide ultimate liability protection, so if part of the business fails, it won’t jeopardize the others.
Benefits of an LLC
Here are a few of the many advantages of forming an LLC.
If you are operating multiple businesses, or if you own a few businesses with different purposes, then you may want to use a holding company in order to limit your liability. This liability protection is afforded to all LLCs and makes sure that your personal assets are not at risk.
For example, if you operate three different businesses under one LLC, and one business is sued, then the assets of all the other businesses will be at risk. When you separate each business into its own LLC, you are also separating their assets and liabilities. This provides a wall around each business, to separate it from any other debts and liabilities.
Since an LLC is flexible, members can be individuals, partnerships, trusts, or corporations. There is no limit on the number of members.
If you own multiple separate LLCs, you will need to file a tax return for each one. If you have multiple LLCs this can be complicated. This can be a lot. When you have your LLCs in a parent, holding company structure, all profits and losses of the subsidiary LLCs will pass through to the parent LLC. This means that you would only have to file one tax return for all of your LLCs.
This is because subsidiary LLCs are typically single-member LLCs, and single-member LLCs are disregarded entities for tax purposes, this leads to income being reported on the parent company's income tax returns.
The way that members can manage the LLC or elect a management group, can do so however they wish.
LLC vs Corporation
Corporations traditionally pay corporate income tax, as well as shareholders being taxed on distributional income. This is called double taxation. Corporations can avoid this “double taxation” if they elect S corporation status. Despite this, S corporations have strict eligibility rules, and they cannot be owned by other corporations or LLCs.
LLCs enjoy pass-through taxation so there is no corporate tax. All of the profits pass through the owner’s personal tax returns, so if you want to set up subsidiary companies and have pass-through taxation, you must set them up as LLCs.
Overall, creating parent and subsidiary LLCs is one way for business owners to minimize their overall liability risk. It is best to weigh your options and make a decision that makes sense for you and your company.