1. S Corporation Ownership Rules
2. LLC Ownership Rules
3. LLC Ownership of an S Corporation
4. When Can an S Corporation Own an LLC

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. 

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Individuals who are citizens of the U.S., permanent residents, and some estates and trusts can own an S corporation. 

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An S corporation can't be owned by other business entities, however, such as partnerships or C corporations.

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S corporations must have less than 100 shareholders and only one class of share.

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Certain types of business, such as financial institutions and insurance companies, can't operate as an S corporation. 

LLC Ownership Rules

Unlike an S corporation, there are few restrictions on who or what kind of businesses own an LLC. 

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Any organizer who can file valid articles of organization is permitted to operate and create an LLC.

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Any individual or business entity, even S corporations, can own or be a member of an LLC.

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Similar to how an S corporation can't operate certain businesses, some states have restrictions on businesses that provide services that require licensure, however.

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. 

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. 

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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.

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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.

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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. 

If you need help changing from S corporation to an LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.