Can an LLC Have Subsidiaries: Everything You Need to Know
Are you wondering, can an LLC have subsidiaries? An LLC can have subsidiaries.3 min read
Forming a Parent Company for Multiple Businesses
Are you wondering, can an LLC have subsidiaries? An LLC can have subsidiaries. Parent companies (also known as holding companies or umbrella companies) are usually formed as corporations. They own a large (controlling) amount of interest in a different company, which is called its subsidiary.
Small business owners frequently own a handful of businesses. Usually, the businesses are each kept separate as individual LLCs with one parent or holding company that acts as an umbrella entity. Business owners want to keep each business as its own LLC to avoid liability issues between the companies — if one company goes under, they wouldn't want that to affect the other companies.
In a case where a business owner has large assets, they might choose to form a parent company to hold those assets while the subsidiaries are the operating companies that actually function as businesses and don't have assets.
Most business entities can own or be owned by other business entities, but there are a few restrictions with the IRS. If an LLC owns a corporation, the LLC entity has to file C Corporation (C Corp) status for taxation.
S Corporations (S Corps) may only be owned by individuals (and in some cases trusts or estates), not other entities like LLCs.
Sole proprietorships cannot own any other business entities, because they have a limited tax status and are not registered with the state.
Parent LLC Versus Stand-Alone LLC
An LLC is a business structure that falls somewhere between a partnership and corporation. It is similar to a corporation because the members (owners or partners) are protected from financial and legal liabilities. LLCs are similar to partnerships because they are taxed as pass-through entities meaning that the profits of the company pass through to the members and are only taxed once as the personal income of the members.
LLCs can operate as stand-alone businesses or as holding companies for subsidiaries. Each type of structure has good and bad aspects.
Stand-alone LLCs are formed without legal or financial ties to any other entities. The stand-alone LLC avoids business taxes and distributes all income to its members.
Parent LLCs act as umbrellas over subsidiaries like other LLCs and can control the operations of those entities. Usually, when one LLC buys another LLC, the companies decide to take on this parent-subsidiary business structure for easier transitions and investment options.
One of the biggest advantages of a parent LLC is the liability protection. If a subsidiary LLC under a parent LLC goes bankrupt or has legal issues, the other subsidiaries and the parent company are unlikely to be affected. The best way to avoid connected liabilities between parent and subsidiary companies is to keep all assets, like properties and finances, separate. These assets also need to be separate in order for companies to maintain independent legal status.
Certain states require an entity tax that the subsidiaries are responsible for, but in most cases the income for a subsidiary LLC passes through to the owners of the parent LLC.
The advantages of stand-alone LLCs include:
- Easier set-up and management.
- No need to maintain separate finances.
- Avoidance of extra taxes.
Stand-alone LLCs are simpler than parent LLCs, but they don't provide the added liability protection that comes with subsidiaries.
Creating a Subsidiary Under an LLC
Subsidiaries are controlled by parent or holding companies as the parent company owns a majority of voting stock in the subsidiary.
An LLC might choose to form subsidiaries in order to branch out into other markets or enterprises while protecting the assets of the original company.
To form a subsidiary under an LLC follow these steps:
- Decide on a company name for the subsidiary (be sure to meet the name requirements in your state and to make it a different name from the parent company).
- Perform a name search on the Secretary of State (SOS) website for your state to be sure the name is available for use.
- Complete the articles of organization for the subsidiary (hire an attorney for help).
- Complete an operating agreement (should remain in step with the operating agreement of the parent company).
- Register and file the required documents with your SOS or the appropriate division.
- Acquire all the necessary permits and licenses needed in order to begin business.
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