Can an LLC Own Another LLC: Everything You Need to Know
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. 4 min read
2. Disadvantages of Master and Subsidiary LLCs
3. Tax Treatment for LLC Holding Company
4. Investment Funds as LLC Members
Updated October 23, 2020:
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.
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.
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.
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.
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