Key Takeaways

  • An LLC can own another LLC either wholly or partially, acting as a parent or holding company.
  • This structure is commonly used for risk management, asset protection, and streamlining operations.
  • Series LLCs offer a unique way to manage multiple business lines while maintaining liability separation.
  • Tax implications vary depending on the election (disregarded entity, S corp, or C corp).
  • While beneficial, master-subsidiary structures come with added administrative costs and legal complexity.
  • DBAs (Doing Business As) are not substitutes for distinct LLC entities and offer no liability protection.

Can an LLC own another LLC? Yes--in fact, an LLC can own numerous LLCs in a structure as a holding company or a series LLC. The owner LLC is called the master entity, and the LLCs it owns are called LLC cells. The establishment of a limited liability company is governed at the state level, and only some states offer the holding company structure.

Business consultants will usually advise an entrepreneur to set up an LLC and create subsidiary LLCs for each business he or she wants to operate. However, while most states allow one-member LLCs, it is not advisable to have only a single member since most LLCs are set up to function like a partnership.

Owners of an LLC are also referred to as members. Few limitations exist on who can be a member; members can be other businesses, individuals, or other LLCs.

What Is the Benefit of an LLC Owning Another LLC?

If an LLC member owns multiple businesses, it is often advised that he or she to form a master LLC and then break up these businesses into subsidiaries to minimize the risk if one of them is not doing well. For example, if one of the LLCs is losing value, this will not affect any of the other member's businesses because they are separate LLCs.

The holding company structure is commonly used for real estate companies and construction firms. For example, if you own several apartment buildings, each can be set up as a separate LLC within the main holding company. This prevents the debts, lawsuits, and issues of one business from affecting the financial standing of the other business or your personal finances. For example, if someone is injured at one of your business's locations and files a lawsuit, only the LLC that owns that building will be impacted.

How a Series LLC Compares to Traditional LLC Ownership

A Series LLC is a unique legal structure that allows a single “parent” LLC to form and operate multiple “series” or “cells” under one umbrella. Each series can hold its own assets, have its own members, and operate independently from the others, while still being part of the same overarching LLC.

Advantages of using a Series LLC include:

  • Reduced Filing Requirements: Only the parent LLC typically files formation documents, simplifying state-level compliance.
  • Individual Liability Protection: Each series has its own liability shield, potentially protecting one series from the debts or liabilities of another.
  • Cost Efficiency: You may avoid the costs of forming and maintaining multiple LLCs, depending on the state.

However, Series LLCs are not recognized in every state, and legal uncertainty exists around how courts in non-series-friendly states may treat inter-series liabilities. It’s best to consult a business attorney before choosing this route.

Disadvantages of Master and Subsidiary LLCs

Although owning multiple LLC's can help protect your assets, having more than one business is more time-consuming than managing one. The maintenance and upkeep of owning multiple businesses will be a heavier burden the more there are. For example:

  • Someone who wants to form an LLC has to spend a lot of time researching and preparing.
  • Articles of Organization must be created and filed with the Secretary of State, as well as an Operating Agreement.
  • Each filing costs money, and if you have more than one LLC, you will have multiple forms to file which requires more money.

Every LLC also needs to maintain its own records, bank accounts, tax documents, and payroll.

In addition, forming a master LLC with subsidiaries is not a sure-fire way to protect each one from liability. The problem with the master-subsidiary structure is that it puts all of your LLCs in one basket.

If the master LLC is involved in litigation, then all the master LLC's assets, including the subsidiary LLCs, are at risk. Owners can also be held personally liable if they acted negligently. Some owners may think the risk of having a claim brought against the parent company is low, but they need to be mindful that this scenario is not that unusual.

For example, if you, the owner of LLC #1, are driving to meet a prospective tenant who wants to rent a home owned by that business and you run a red light and kill or injure somebody, you, the parent company, and LLC #1 could each be held liable.

If the judgment exceeds the parent company's insurance coverage, the creditor will take everything the business owns until the judgment is satisfied.

If you are contemplating using the parent-subsidiary entity structure, you will have to decide which is more important: maximizing asset protection or minimizing administrative burdens and expenses.

Legal Considerations When One LLC Owns Another

Although forming multiple LLCs may offer better asset segregation, you must observe strict formalities to maintain legal separation between entities. Failure to do so may result in “piercing the corporate veil,” where courts disregard the LLC structure and hold owners personally liable.

To minimize this risk:

  • Maintain separate operating agreements for each LLC.
  • Use distinct bank accounts and keep financial records separate.
  • Avoid commingling funds between the entities.
  • Sign contracts and lease agreements under the correct LLC name.

In addition, an LLC cannot use a DBA (Doing Business As) to create a legally distinct entity. A DBA does not offer liability protection and is merely a different trade name for the same LLC.

Tax Treatment for LLC Holding Company

An LLC can opt to be taxed as a disregarded entity (like a sole proprietorship or partnership) or as a C or S corporation. C corporations are required to pay corporate income tax on their profits. These profits are taxed again at the individual level when they are distributed to shareholders, an effect known as double taxation.

Your LLC can avoid double taxation by electing S corp status. However, an S corp cannot be owned by another LLC. Members must be individuals, estates, or certain trusts. An S corp LLC enjoys pass-through taxation, so profits are not taxed at the corporate level. Instead, they are only taxed once, at the individual shareholder level.

When you file taxes for a Series LLC, the master entity and its subsidiaries may be treated differently. It's important to consult a tax professional to understand how your Series LLC will be taxed.

Can an LLC Elect S Corp Status and Still Own an LLC?

Generally, an S corporation cannot have an LLC as a shareholder, but the reverse is not always true. An LLC that elects to be taxed as an S corporation can potentially own another LLC, provided the ownership structure complies with IRS requirements.

However, if the subsidiary LLC also elects S corp taxation, it may violate the S corp shareholder eligibility rules, which require shareholders to be individuals or certain trusts—not entities. In this case, the IRS may revoke the S corp election.

Always consult a tax advisor to determine if an S corp election aligns with your goals and structure, especially when multiple entities are involved.

Investment Funds as LLC Members

Forming an LLC that is owned by your IRA account can help you optimize this asset by avoiding rules prohibiting certain types of transactions that carry tax and penalties. For example, your spouse cannot own more than 50 percent of an LLC that is co-owned by your IRA. However, you can create a parent LLC with the existing LLC and the IRA as separate subsidiaries.

A trustee of an irrevocable trust may form an LLC owned by the trust, which then owns an LLC formed by the family. This combines the protection of your family's assets with estate planning.

Funding a Subsidiary LLC

An LLC can fund another LLC in two primary ways:

  1. Equity Investment: The parent LLC contributes capital in exchange for ownership interest in the subsidiary. This provides voting rights and entitlement to a share of profits.
  2. Loan Arrangement: The parent LLC loans money to the subsidiary, which must repay it with interest. This structure avoids ownership dilution but may affect the subsidiary’s cash flow.

Each method carries different tax and asset protection implications. Loans must follow fair market terms to avoid reclassification as equity by the IRS. It's advisable to document all financial transactions between entities clearly and professionally.

Frequently Asked Questions

  1. Can an LLC own 100% of another LLC?
    Yes, an LLC can wholly own another LLC, acting as a parent company or holding company.
  2. Is a Series LLC the same as owning multiple LLCs?
    No. While a Series LLC allows multiple divisions under one parent LLC, traditional ownership involves forming separate LLCs.
  3. Can a DBA be used instead of forming a new LLC?
    No. A DBA is not a separate legal entity and does not provide liability protection.
  4. What happens if the parent LLC is sued?
    If the parent LLC is sued and it owns subsidiary LLCs, those assets may be at risk unless legal and financial separations are properly maintained.
  5. Can an S corp LLC own another LLC?
    It depends. An LLC taxed as an S corp can own another LLC, but S corp rules limit entity ownership. Consult a tax professional to evaluate compliance.

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