Can an LLC Own Another LLC?

Can an LLC own another LLC? The answer is not only yes, but an LLC can own numerous other LLCs in what is called a holding company structure. The owner LLC is called the master entity, and the LLCs it owns are called LLC cells.

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

Owners of an LLC are also referred to as members, and the LLC is owned by each member. There are not many limitations on who can be a member; therefore, members can be other businesses, individuals, or other LLCs.

What is the Benefit of an LLC Owning Another LLC?

If an LLC member has multiple businesses, it is often advised for him or her to form a master LLC and then break out into subsidiaries to minimize the risk if one of the businesses 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.

Disadvantages of Master and Subsidiary LLCs

Having more than one LLC will be more time-consuming than only having to manage one. The maintenance and upkeep of owning multiple businesses will be a heavier burden the more there are.

There’s also a lot required to set up an LLC. For example, someone wishing 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 you are taking your carefully and expensively created separate entities that you formed to maximize asset protection and putting them all in one basket.

If the master LLC is involved in litigation, then all of the master LLCs’ assets, including the subsidiary LLCs, are at risk. Owners can also be held personally liable if they are sued for their own negligence. Some owners may think the risk of having a claim brought against the parent is low, but they need to be mindful that this scenario has happened before.

For example, if you are driving to meet a prospective tenant who wants to rent a home owned by LLC #1 and you run a red light and kill or injure somebody, you and the parent and LLC #1 will be sued and you and the two LLCs will be liable.

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

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

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