Can a C Corp Own an LLC: Everything You Need to Know
Can a C corp own an LLC? It's possible for a C Corp to have ownership of an LLC, but it can be complicated. 5 min read
2. Limited Liability Companies
3. Articles of Organization
4. LLC Membership Requirements
5. Holding and Operating Companies
6. Professional LLC Requirements
7. Why a Corporation Might Want to Form an LLC
8. Advantages to Starting a C Corp
Updated July 14, 2020:
Can a C corp own an LLC? It's possible for a C corp to have ownership of an LLC, but it can be complicated. There are a variety of reasons for a C corp to own an LLC. It's important to have different accounting books for each corporation. Extra liability will be created if the purpose is solely to move money around.
How C Corp Ownership Works
If a C corp owns LLCs, they often have a varying set of products or projects. They also tend to have different partners. This structure often occurs when creating joint ventures, subsidiaries, and operating units. The C corp parent will be disregarded when it comes to taxes if they are the sole member of the LLC.
Any expenses and revenue from the LLC will then be reflected on the C corp's tax return. If there are multiple members in the LLC, such as in a joint venture, the expenses and revenue of the LLC will be allocated as is stated in the operating agreement.
Limited Liability Companies
Corporations were the main choice that entrepreneurs used until the 1970s, when they were looking for extensive tax benefits and legal protection. Since limited liability companies have become available, there are a variety of options business owners can choose when looking for decreased liability. LLCs are different from corporations, as they have flexible management options such as unlimited ownership.
LLCs also are unique because there is no restriction when it comes to ownership. LLCs can be owned by foreign entities, individuals, other LLCs, or corporations. LLCs can be formed by corporations to perform a variety of duties. Most states will restrict banks or insurance companies from forming an LLC, however. These types of entities are normally restricted to only corporation status.
Articles of Organization
It's necessary for a corporation to go to the Secretary of State to file articles of organization. This will give their LLC legal recognition. The following must be included in an LLC's articles of organization:
- The name of the LLC.
- The name of the LLC's registered agent.
- The names of the members who are forming the LLC.
The registered agent will typically be the corporation's law firm or legal department. They are required to file any legal notices for the LLC. If a corporation chooses to form an LLC, they can decide to file taxes as either a corporation or sole proprietor. Many corporations prefer to file as a sole proprietor, as they can then combined their taxes on Form 1120.
LLC Membership Requirements
There are not many restrictions on which individuals or businesses can serve as an LLC member. Individuals are usually at least 18 years old or the state's age of majority. There is no restriction on citizenship requirements for those who want to be LLC members. It's also not necessary for the corporation to be in the same state as where the LLC is formed.
The name of an individual or company who owns part of the LLC is called a member. Each member is protected by the LLC legally. Corporation members will get extra protection because of their affiliation and incorporation with the LLC.
An LLC operating agreement will be entered into by the members to decide how the company will be operated. This is typically formed by an attorney, which is then filed with the Corporations Commissioner or Secretary of State. The agreement lays out clearly how any important decisions will be handled on behalf of the LLC.
Holding and Operating Companies
A typical situation for a corporation who is a member of an LLC is where they use the structure of an operating and holding company. The business owner can then create both an operating company and holding company as entities. The holding company will own any business assets. They will then lease these assets out to the operating company. The corporation will use these assets when they're running a business.
The holding company can be a corporation and will be a member of the operating company, which can be an LLC. A business owner can then get assets from creditors by using the operating and holding company structure.
Professional LLC Requirements
There are not many states that restrict who can be a member of an LLC. However, there are regulations and restrictions on professional limited liability company (PLLC) memberships. PLLCs are LLCs that are set up to provide public services, such as legal, accounting, and medical services. The PLLC members need to be professionals registered in the field of the service they'll be giving. A corporation cannot be a member of a PLLC.
Why a Corporation Might Want to Form an LLC
LLCs can sometimes enjoy more privacy than corporations when it comes to sharing information like the names of members and their share percentages. This varies by state. Some states only require an LLC to disclose members with certain share percentages. For instance, the state of Ohio requires LLCs to list members who own more than five percent interest in the company, but not less.
Some corporations will use an LLC structure when venturing out into new territory. Because it can be fairly simple to form an LLC, corporations can do so without much effort and focus on their new ideas and developments. This is especially ideal in states where LLCs are not required to file operating agreements or annual reports, because the corporation can try out different ideas without the public getting information about what they're doing.
Advantages to Starting a C Corp
Some find the start-up process for a C corp easier than for other entity types like S corps or LLCs. This will mostly depend on the business owner's plans for the company and the state they plan to do business in.
There are some opportunities for tax exemption available to C corps. For example, C corps can issue what's called a QSBS or qualified small business stock which can quality for tax exclusion and rollover benefits through the Internal Revenue Code.
C corporations are able to participate in equity and debt financing, unlike other entity types. They are also much more attractive to potential investors. Because of the business structure, venture capitalists are much more likely to invest in a C corp than in an LLC. Owners or shareholders in a C corp aren't subject to being taxed for any of the company's income except what is specifically distributed to them through shares.
S corps are limited to only 75 shareholders, but C corporations can go public and have an unlimited number. This leads to more potential capital for the business.
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