Key Takeaways

  • Yes, an S corporation can own an LLC, but IRS rules and state laws impose specific restrictions depending on the LLC’s tax classification and ownership structure.
  • S corporations must follow strict shareholder eligibility rules—only certain individuals, estates, and trusts can be shareholders, and they cannot be owned by other corporations or partnerships.
  • LLCs are more flexible in ownership, allowing individuals, corporations, and even S corporations as members, with some state-specific restrictions on professional services.
  • An S corporation can own a single-member LLC (often treated as a “disregarded entity” for tax purposes) or be part of a multi-member LLC, but tax treatment and compliance requirements differ.
  • The tax classification of the LLC—whether it’s taxed as a partnership, corporation, or disregarded entity—determines whether S corporation ownership is permissible and how profits are reported.
  • Improper structuring of ownership could jeopardize an S corporation’s tax status, so legal and tax planning is critical before forming cross-ownership arrangements.

Can an S corp be a member of an LLC? Limited Liability Companies (LLC) and S corporations are very similar, particularly in terms of taxes. They are both “pass-through” entities, which are companies in which the income earned is passed through to shareholders of the S corporation or the members of the LLC for taxation purposes. This prevents the entities themselves from being taxed.

Despite the similarities, the ownership of an S corporation and an LLC are different, as in whether an S corporation can own an LLC, or an LLC can own an S corporation. 

LLC and S corporations have two designations under different legal framework. LLCs are businesses of laws governing the state and have restrictions on ownership. An S corporation isn't a business entity, but rather a federal tax classification, according to the IRS.

Both LLCs and corporations have the option to be taxed as a subchapter S corporation, however.

S Corporation Ownership Rules

  • The IRS determines an S corporation's ownership requirements, and these rules are very rigid.
  • Individuals who are citizens of the U.S., permanent residents, and some estates and trusts can own an S corporation.
  • An S corporation can't be owned by other business entities, however, such as partnerships or C corporations.
  • S corporations must have less than 100 shareholders and only one class of share.
  • Certain types of business, such as financial institutions and insurance companies, can't operate as an S corporation. 

Why Shareholder Restrictions Matter for LLC Ownership

The strict shareholder eligibility rules for S corporations directly affect whether and how they can own an LLC. If an S corporation invests in an LLC that is taxed as a partnership, each member of that LLC is treated as owning a proportionate share of the partnership’s assets and income. If one of those members is an ineligible shareholder under IRS rules, the S corporation could lose its S status. This makes it essential to confirm that the LLC’s members are all qualified S corporation shareholders. Additionally, S corporations must ensure that their investment in the LLC does not inadvertently create a second class of stock, which would also terminate S status. For example, if the LLC’s operating agreement gives disproportionate distributions or liquidation rights, it could be deemed a separate class of equity.

LLC Ownership Rules

  • Unlike an S corporation, there are few restrictions on who or what kind of businesses own an LLC.
  • Any organizer who can file valid articles of organization is permitted to operate and create an LLC.
  • Any individual or business entity, even S corporations, can own or be a member of an LLC.
  • Similar to how an S corporation can't operate certain businesses, some states have restrictions on businesses that provide services that require licensure, however.

State-Specific Considerations for S Corp Membership in LLCs

While LLC ownership rules are generally broad, each state may impose additional conditions that impact whether an S corporation can be a member. Some states restrict LLC membership for companies engaged in regulated professions—such as legal, medical, or accounting services—unless all members hold the necessary licenses. In these cases, even if the IRS permits the ownership, state law may prevent it.States also have varying rules on LLC management structures. In a manager-managed LLC, the S corporation could appoint a manager to oversee operations, whereas in a member-managed LLC, the S corporation would be directly involved in decision-making through its authorized representative. Understanding these nuances can help align business operations with both federal tax rules and state corporate law.

LLC Ownership of an S Corporation

Because of the rigid requirements for S corporations outlined by the IRS, the relationship between an LLC and an S corporation is complicated. 

If an LLC has multiple owners or members and is treated as a partnership, the LLC is not permitted to own shares in an S corporation. This is because a partnership is not an eligible S corporation shareholder.

A corporation can't be an S corporation shareholder either, which is why an LLC treated for tax purposes as a corporation isn't eligible to own an S corporation.

The same tax rules used for partnerships will be applied to LLCs with multiple members. The exception to this is if the LLC chooses to be taxed as a corporation.

Since shares of an S corporation cannot be owned by a corporation or partnership, multi-member LLCs, which are considered partnerships, cannot own S corporations either.

Single-member limited liability companies have income passed through to the only member of the LLC, from a tax perspective. A single-member LLC can own part of an S corporation depending on the circumstances. Where it has chosen to be pay taxes as a corporation, or where the sole member is a partnership or corporation, it can't hold ownership of an S corporation. If a single-member LLC is owned by a single person, however, that individual may be eligible to own a portion of an S corporation. 

Tax Classification Pitfalls for Cross-Ownership

The tax classification of the LLC plays a decisive role in determining whether it can hold S corporation shares. If an LLC elects corporate taxation and becomes a C corporation for tax purposes, it cannot own S corporation stock, as corporations are ineligible S shareholders. Likewise, an LLC taxed as a partnership is also ineligible, since partnerships cannot hold S stock. One exception is when the LLC is a single-member disregarded entity owned by a qualified shareholder, such as an individual or certain trusts. In that case, the IRS treats the ownership as if the individual directly owns the S corporation shares. Businesses should evaluate not only current ownership structures but also potential future changes—such as adding new members—that could alter tax status and eligibility.

When Can an S Corporation Own an LLC

  • Ownership requirements will be different depending on the state, but in general, S corporations are allowed to be LLC members.
  • The main concern is not whether an S corporation is allowed to hold ownership in an LLC, but what taxation will be required.
  • Because limited liability companies are pass-through entities, S corporations that hold sole ownership of an LLC and choose corporate taxation will cause the LLC to become disregarded, which would transfer income to the S corporation for taxation.
  • If the LLC has a multi-member structure, it will be treated as a partnership, resulting in income being taxed through the LLC's owners.
  • An LLC that is being taxed as a corporation will need to file an individual tax return.
  • A lot goes into an S corporation being a member of an LLC. You may want to consult a professional attorney to decide what's best for you. 

Benefits and Risks of S Corporation Ownership of an LLC

When structured correctly, an S corporation owning an LLC can offer strategic advantages:

  • Liability Protection: The LLC structure can shield the S corporation from liabilities tied to specific business activities.
  • Operational Flexibility: An LLC can engage in ventures or hold assets without affecting the S corporation’s main operations.
  • Tax Efficiency: A single-member LLC owned by an S corporation is typically disregarded for tax purposes, allowing income to flow directly to the S corporation’s return without an additional filing.

However, there are also risks:

  • Loss of S Status: Improper structuring—such as joining an LLC with ineligible members—could terminate S corporation election.
  • Complex Compliance: Multi-member LLC arrangements may require separate partnership returns and careful income allocation.
  • State-Level Taxes: Some states impose entity-level taxes or fees on LLCs regardless of federal pass-through treatment, which could increase costs.

Careful planning with legal and tax professionals can ensure that the benefits outweigh the risks and that both entities remain in good standing with federal and state authorities.

Frequently Asked Questions

  1. Can an S corp own an LLC taxed as a corporation? Yes, but the LLC would be treated as a separate taxable entity, and the income would not pass through directly to the S corp.
  2. Can a multi-member LLC have an S corp as a member? Yes, but only if all members are eligible S corp shareholders to avoid jeopardizing the S election.
  3. Does an S corp owning an LLC need to file separate tax returns? A single-member LLC is disregarded for tax purposes, but a multi-member LLC typically files Form 1065.
  4. What happens if an LLC’s tax classification changes? A change from disregarded entity to partnership or corporation could affect S corp eligibility and tax treatment.
  5. Why might an S corp use an LLC for part of its business? To isolate liabilities, create separate ventures, or manage specific assets without affecting the main corporation’s operations.

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