Key Takeaways

  • An LLC can own another LLC as a subsidiary, providing liability protection and operational flexibility.
  • Holding companies (parent LLCs) allow business owners to manage multiple ventures under one entity while keeping finances and liabilities separate.
  • Stand-alone LLCs offer simplicity but lack the liability shielding of a parent-subsidiary structure.
  • Taxation considerations vary depending on the structure, as LLC subsidiaries often pass income to the parent LLC.
  • Proper legal documentation is necessary when forming a subsidiary, including articles of organization and operating agreements.
  • Series LLCs provide an alternative structure where multiple business units operate under one LLC but maintain separate liability.
  • UpCounsel connects business owners with top legal professionals for LLC formation and structuring assistance.

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.

LLC startups are actually quite simple and can be started by only one person. Visit the Secretary of State website for your state to see the requirements for forming an LLC.

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. 

Why Create a Parent LLC?

Creating a parent LLC that owns one or more subsidiary LLCs is beneficial for businesses seeking to separate assets, minimize liability, or expand into multiple industries. This structure offers:

  • Liability Protection: If one subsidiary faces legal or financial trouble, other subsidiaries remain unaffected.
  • Simplified Management: A parent LLC centralizes decision-making while allowing subsidiaries to operate independently.
  • Tax Efficiency: The parent LLC can consolidate profits and expenses, potentially reducing overall tax liability.

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.

Series LLCs: An Alternative to Parent-Subsidiary Structures

A Series LLC is a special type of LLC that allows multiple businesses to operate under one umbrella while maintaining separate liability. This structure is available in some states and offers:

  • Limited Liability for Each Series: Each "series" functions like a subsidiary but without needing to form separate LLCs.
  • Cost Savings: Instead of registering multiple LLCs, a business owner can create series within a single LLC.
  • Simplified Administration: A Series LLC requires one set of formation documents, reducing paperwork and administrative costs.

While a Series LLC can be beneficial, it’s not recognized in all states. Business owners should check state-specific regulations before pursuing this option.

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. 

Legal Considerations When Forming a Subsidiary LLC

When creating a subsidiary LLC under a parent company, it’s essential to follow legal best practices to maintain corporate separateness:

  • Separate Business Accounts: Each subsidiary should have its own bank account to avoid piercing the corporate veil.
  • Distinct Operating Agreements: The subsidiary should have an operating agreement outlining its specific governance and relationship with the parent LLC.
  • Independent Business Operations: Subsidiaries should conduct business under their own names, maintain separate financial records, and avoid commingling funds.

Frequently Asked Questions

  1. Can an LLC own another LLC in every state?
    Yes, most states allow LLCs to own other LLCs, but business owners should check specific state regulations, especially for taxation.
  2. What are the tax implications of an LLC owning another LLC?
    The IRS typically treats LLCs as pass-through entities, meaning profits from the subsidiary LLC flow to the parent LLC and are taxed at the owner level.
  3. Is a Series LLC better than a parent-subsidiary LLC structure?
    A Series LLC can be more cost-effective and administratively simpler, but it’s not recognized in all states. Parent-subsidiary structures offer broader legal recognition.
  4. How do I keep my LLC subsidiaries legally separate?
    Maintain separate bank accounts, tax filings, and business records for each subsidiary to ensure they remain distinct legal entities.
  5. Do I need a lawyer to form a subsidiary LLC?
    While it's possible to form a subsidiary LLC without legal assistance, consulting a business attorney can ensure compliance and proper structuring.
     

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