What Is an LLC?
A limited liability company, or LLC as it’s commonly abbreviated, is a business structure that offers personal liability protection to its owner(s). In many ways this entity type is like a hybrid of a corporation and a sole-proprietorship (or partnership). It is an entity separate from its owners and offers liability protection just like a corporation does, while also enjoying the pass-through taxation classification of a sole-proprietorship. This means that the profits of the business are reported on the owner’s personal tax returns.
Owners of an LLC are referred to as members and can consist of a single individual, known as a single-member LLC, or consist of multiple people, known as a multi-member LLC. The LLC structure is a popular choice among business owners as it’s the simplest way of achieving personal asset protection from business liabilities.
There are multiple benefits that businesses can achieve through a limited liability company structure:
- Limited Liability: Whether you’re operating a single business or multiple businesses, the LLC limited liability protection can shield your personal assets from risk, as well as protect your business assets by insulating those assets from outside risk.
- Tax Simplicity: LLCs enjoy pass-through taxation as their default classification, meaning that profits are reported on the personal tax returns of owners. In the case of a series LLC, subsidiary LLCs are typically single-member disregarded entities, meaning that profits are reported on the parent-LLC’s income tax return.
- Membership Flexibility: Whether a single-member LLC or multiple-member, LLCs have lots of flexibility when it comes to ownership. There is no limit on membership and owners can determine their own management and profit structures with an operating agreement.
- Increased Credibility: LLCs typically enjoy more credibility and market appeal when compared to a sole-proprietorship or partnership. The LLC structure lends more stability and prestige to your business in the eyes of prospective customers and investors.
Can an LLC Own Another LLC?
While LLCs continue to grow in popularity for business owners, many are unaware of the fact that an LLC has the option of owning another LLC. This process can be completed with what is known as a series LLC structure. The series LLC structure allows for a traditional LLC to create subsidiary LLCs under the framework of a single limited liability company.
If you’re wondering about the legality around this ownership structure, you don’t have to be concerned. One LLC owning another LLC is a legal practice, as LLC law has few restrictions on who is allowed as a member of an LLC (i.e. an owner). This allows for LLC membership to consist of both individuals and business entities.
Why Would an LLC Own Another LLC?
When a business utilizes a series LLC (i.e. own one LLC with another), it is most often done to insulate the business debts and obligations of one LLC from the other. Additionally, owners still enjoy the traditional LLC personal liability protections with this structuring.
If you’re a business owner with multiple lines of business, a series LLC would allow you to form a parent LLC with one or more subsidiary LLCs. With this structure in place, if one business were to fail, it would not jeopardize the financial health of the others. This structuring is commonly used when one line of business, or a certain aspect of a business, is particularly more risk prone than another.
Here’s an example to give you a better sense of how this structure might be enacted. Say that you owned an apartment building and a commercial property. If you were to personally own each of these properties, you would be personally liable for any debts or obligations associated with either. And if you used a traditional LLC to purchase the properties, your personal assets would be shielded from risk, but both properties would be exposed to the liabilities of the other.
However, if you create a parent LLC then purchase each property with a subsidiary LLC (one for the apartment and one for the commercial property), then not only are your personal assets protected from liability but each business is insulated from the other.
If you’re considering forming a series LLC, be sure to consult an experienced attorney that can determine whether this is the best decision for your business based on your exposure to risk and administrative ability.
Setting up and operating a series LLC will require more attention and cost than operating only one. For example, each LLC that you form will require its own registration, filing fee, bank account, financial records, and more. Additionally, the parent-subsidiary structure does not guarantee the avoidance of all liability. In the event that the parent LLC is sued, all of its business assets, including that of its subsidiaries, could be at risk.