Updated November 9, 2020:

Can a Corporation Own an LLC?

The main choice for those who were looking for tax benefits that were extensive and with legal protection was corporations until the 1970s. The limited liability company (LLC) was then introduced and gave those who own a business a variety of options if they were looking for decreased liability. 

LLCs are different from corporations because there are more flexible options when it comes to management, such as having unlimited ownership. There is no restriction when it comes to owning an LLC. They can be owned by another LLC, a foreign entity, or an individual. 

A variety of duties can be performed when an LLC is formed by a corporation. There some restrictions, such as a bank or insurance company being able to form an LLC. A person or business that owns an LLC is a member, and each member will be protected by the LLC legally. 

Those who are corporation members will have extra protection because they're affiliated with an LLC and have their own incorporation. When becoming LLC members, the people will go into an operating agreement to discuss how the business should be run. 

This will be formed by someone who is an attorney, which will then be sent to the Corporations Commissioner or Secretary of State. The corporation will then need to file the Articles of Organization so the LLC can get recognition legally. Included in the Articles of Organization must be the following:

  • the name of the LLC.
  • the members' names who are forming the LLC.
  • the registered agent's name of the LLC. 

This is often the law firm of the corporation or the legal department. Taxes must be filed as a corporation or sole proprietor for a corporation. It can be easier to file as a sole proprietor, as the taxes can be combined on Form 1120.

Benefits of an LLC

There is a benefit for LLCs when filing taxes, which is flow-through taxation. The definition of this is any profits or losses of the company will be transferred to the tax return of the responsible member. This means that instead of two corporate tax returns being returned annually, the business can claim any losses or profits of the corporation. When filing a new initiative or division, it is smart to form an LLC. There is not much burden on the administration to form them.

The state statute authorizes LLCs to become business organizations. An annual report or operating agreement is not necessary for many states when it comes to LLCs. This is a benefit for the business, as it means they can test out a concept or idea without needing to put out financial reports publicly. Business owners can create multiple entities, which include an operating company and a holding company. A corporation can be a member of the LLC if they make the most of the structure of the operating and holding company.

Benefits of an S Corp

A holding company will be in charge of all assets related to the business. They can then lease them to the operating company, who will then make the most of the assets used when operating a business. The holding company can be a corporation and a part of the operating company. The business owner can then use their creditors' business assets by using an operating or holding company structure.  A limited liability company can be owned up to 100 percent by an S corp.

LLC members are not allowed to be shareholders when it comes to S corporations. However, the opposite is true - if an S corporation owns an LLC, it is legal. There are many similarities when it comes to LLCs and S corps. For example, both of these structures can pass on their losses or profits to their owners, which they can use on their personal tax submission. 

However, S corps also have different benefits than LLCs. They can have stock, have the option for their stock to be purchased or sold as the owner wishes, and have perpetual existence. Many tax-free benefits are available as well. These include travel, insurance, retirement options, and being able to change the owner without the management being affected.

If you need help with forming an LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.