Can an S Corp Own an LLC and How It Works

Key Takeaways

• Yes, an S corporation (S corp) can own an LLC, but the ownership structure determines how it’s taxed.
• An S corp cannot be owned by an LLC or any other business entity—only by individuals and certain trusts or estates.
• When an S corp owns an LLC, the LLC is often treated as a disregarded entity for tax purposes if it has one owner.
• An S corp may form an LLC subsidiary for liability protection, asset management, or to diversify operations.
• Multi-member LLCs owned by S corps are taxed as partnerships unless they elect corporate taxation.
• Each structure—S corp or LLC—has unique compliance rules, ownership restrictions, and tax implications that should be reviewed before forming a combined entity.

Are you wondering, can an S corp own an LLC? An S corp can own an LLC. Limited liability companies (LLCs) have owners (members) that can be individuals or other business entities. An S corporation (S corp) is a business entity; therefore, it can be a member, or owner, of an LLC.

What Is an S Corp?

S corps are corporations that have filed with the state but have elected a special tax status with the IRS (Internal Revenue Service). S corps elect to be viewed as a sole proprietorship or disregarded entity when it comes to taxation but remain like corporations in every other sense.

Sole proprietorships and disregarded entities are classified as pass-through entities because the company is not taxed on its profits. Instead, its members or shareholders have the profits passed through to them. The company profits are then taxed only once, on the shareholders' personal income tax returns.

Can an S Corp Own an LLC?

Corporations distribute profits to their investors, those who have an ownership percentage in the company, through shares. Corporate business structures are appealing because they allow the company to sell ownership percentages, or stocks, to anyone in the world.

LLCs can buy into any other business entity, because they have the legal ability to own property and manage assets. An LLC can act as an investor in a corporation just like an individual would, but S corporations can only be owned by actual individuals.

Even though an S corp cannot be owned by an LLC, an S corp can own an LLC. In the terms of an LLC, an S corp can have membership in an LLC.

The IRS approves disregarded entity status to a business with the understanding that the business will make sure that profits are tracked and treated as individual income on the personal tax return of one or several owners, shareholders, or members in the company.

Income that is given to an individual or business entity that is not required to file an income tax return is lost in the eyes of the IRS.

Because of this possibility of lost income, rules and regulations are enforced by the IRS to prevent companies from skirting around paying taxes on business income.

In order for a corporation to file as an S corp (and therefore gain disregarded entity status) the following rules must apply:

• The company shareholders must be individuals, tax-exempt organizations, trusts, or estates.
• Individual shareholders must be citizens and residents of the United States.
• Shareholders cannot be any business entities (LLCs, corporations, etc.).

If another disregarded entity, like an LLC, was an owner of an S corp, income taxes would be missed because the S corp income isn't taxed and is passed to its shareholders. LLC incomes are also not taxed, so the profits would go untaxed.

If only individuals are shareholders in an S corp, all profits passed to individuals are included on their personal income tax returns.

If an S corp tries to pass through any business profits to a shareholder that doesn't meet the requirements (like an LLC or a nonresident alien) the company status is automatically changed back to a corporation and taxed as such from then on.

Understanding How S Corp Ownership of an LLC Works

While it’s clear that an S corporation can own an LLC, how this ownership is structured affects how the LLC is taxed and managed. When an S corp owns 100% of an LLC, the LLC is typically considered a single-member LLC and disregarded for federal tax purposes. In this case, the IRS views the LLC’s income and expenses as part of the S corporation’s tax return.

However, if the LLC has multiple owners—such as another individual or corporation—it will generally be treated as a partnership unless it elects to be taxed as a corporation. The S corp must report its share of income or losses from the LLC on its own return, maintaining the pass-through taxation structure that avoids double taxation.

This setup allows S corporations to use LLCs as subsidiaries for specific projects or business divisions without having to create a separate corporation. It also provides a layer of liability protection, shielding the parent S corp’s assets from risks tied to the LLC’s operations.

S Corp Versus LLC

There are some similarities between S corps and LLCs as both are regarded as pass-through entities by the IRS, and they both protect their members and shareholders from liabilities.

LLCs, however, have a simpler startup than S corps, and they have easier operation requirements and administrative duties. S corps require yearly reports and documentation with the state. LLCs have more freedom when it comes to membership with no restrictions on the amount of members or their status of citizenship.

LLCs are also free to create a unique plan for distributing company profits that isn't required to correlate with ownership percentages or capital contributions. An S corp must distribute shares according to each shareholder's initial investment amount.

An LLC is taxed under self-employment tax, like a partnership or sole proprietorship would be unless it files to be taxed as a corporation.

Even though S corps have more restrictions than LLCs, they have a lot of the benefits that come with the corporate structure. They can buy and sell their company stock but still benefit from avoiding double taxation. LLCs must specify a dissolution date in their articles of organization, but an S corp remains in existence until its shareholders decide to liquidate the company.

Tax Implications When an S Corp Owns an LLC

From a tax perspective, an S corp owning an LLC introduces important distinctions based on how the LLC is classified.

1. Single-Member LLCs: If the LLC has one owner—the S corporation—it is disregarded for tax purposes. The LLC’s activities are reported directly on the S corporation’s return, simplifying tax filing.
2. Multi-Member LLCs: If multiple entities, including the S corp, own the LLC, the IRS automatically treats it as a partnership unless it elects corporate taxation via Form 8832. In this case, the S corp must include its proportionate share of the LLC’s income on its own return.
3. Tax Elections: An S corp–owned LLC can also elect to be taxed as a C corporation, creating a separate layer of taxation but sometimes providing strategic benefits such as reinvestment flexibility or additional deductions.
4. Pass-Through Consistency: It’s crucial to ensure the structure doesn’t jeopardize the S corporation’s “pass-through” tax status, since the IRS prohibits ownership by certain entities like other corporations or foreign shareholders.

Proper documentation, tax elections, and compliance are key to keeping the ownership structure both legal and tax-efficient. Consulting a tax professional or business attorney can help avoid accidental termination of S corp status. 

Why Might an S Corp Want to Own an LLC?

S corps can look to form subsidiaries or form LLCs for various reasons. For instance, LLCs do allow more flexibility than S corps when it comes to ownership and profit distribution. Flexibility in profit distribution is helpful when you have members who offer much in the way of handling day-to-day responsibilities with the company, also called "sweat equity," but perhaps didn't have as large an initial contribution as another member. S corps are required to distribute shares proportional to shareholders' capital contributions, but LLCs are not.

Another common reason an S corp might want to own a subsidiary is to protect a certain valuable asset from liability should the parent company come under legal trouble. They could distribute the asset to shareholders, but this opens the shareholders up to taxation and possible inconvenience in the responsibility of protecting the asset. This depends on what the asset is. If the company is trying to protect something that doesn't generate any revenue, it might be beneficial for them to create a subsidiary in order to do business and have the parent company simply hold the asset.

Benefits and Drawbacks of an S Corp Owning an LLC

Benefits:

• Liability Protection: An LLC can act as a legal buffer, limiting the S corp’s exposure to debts or lawsuits from the subsidiary.
• Operational Flexibility: LLCs can be used to manage new business ventures or hold specific assets (such as real estate or intellectual property) separately from the parent company.
• Simplified Management: Unlike corporations, LLCs have fewer formalities—no shareholder meetings or detailed recordkeeping requirements—which makes them easier for an S corp to administer.
• Pass-Through Taxation: The S corp can maintain its pass-through tax benefits while structuring the LLC in a way that avoids double taxation.

Drawbacks:

• Complex Tax Filing: Managing multiple entities increases administrative and tax filing complexity.
• State Variations: Rules on LLC ownership and taxation vary by state, which can create additional compliance challenges.
• Ownership Restrictions: Since only eligible shareholders can own an S corp, certain LLC ownership combinations could disqualify the parent’s S status if not structured carefully. 

Entity Options for an S Corp Subsidiary

If an S corp wants to form a subsidiary company, it has three entity types to choose from:

• C corp
• Qualified subchapter S corp, or QSub
• LLC

Choosing the qualified subchapter S corp entity type for a subsidiary company of an S corp allows the S corp to maintain all of its tax benefits of being an S corp. The assets of the QSub are viewed as assets of the parent company, so they don't benefit from the liability protection an LLC would.

A single-member LLC is a good choice because it offers the taxation benefits of an S corp, but also the liability protection of a C corp. If holding companies and subsidiaries are kept separate, the assets of one holding company can't be seized in the event that the other holding company is in legal trouble. Parent companies frequently take advantage of this by forming various subsidiaries to each protect different assets.

Legal Considerations and Compliance Tips

When setting up an LLC owned by an S corporation, compliance with both state and IRS regulations is essential. Key considerations include:

• Maintaining Separate Identities: Each entity must keep distinct bank accounts, records, and contracts to preserve liability protection.
• Operating Agreement: The LLC should have a clear operating agreement outlining management responsibilities and how profits are distributed to the S corp owner.
• State Filing Requirements: Some states require disclosure of corporate ownership when forming an LLC, and additional fees may apply for multi-entity structures.
• Preserving S Corp Status: The parent S corporation must ensure that the ownership structure doesn’t inadvertently introduce ineligible shareholders or entities that could revoke its S election.
• Licensing and Tax Registration: The LLC may need its own business licenses and state tax IDs, even though it’s owned by the S corp.

Following these guidelines helps ensure the structure complies with both federal tax law and state-level entity management rules. 

Corporations Serving as Partners

Both C corps and S corps can be partners in a partnership. General partnerships are viewed as business relationships between individuals or companies, but aren't legal structures. Technically, corporations are viewed as individuals in the eyes of the IRS and the law, so they can act as business partners.

General partners in partnerships can be held liable for legal issues with the partnership, but corporations need to be careful not to make their shareholders also liable in such cases. If the legal issues arise due to personal negligence on the part of the owner, they could be held liable. Owners of S corps that are partners in general partnerships are usually protected from liability through the S corp structure.

Alternatives to an S Corp Owning an LLC

If the goal is to diversify operations or protect assets, there are alternatives to forming an LLC under an S corporation:

1. Qualified Subchapter S Subsidiary (QSub): A QSub is a wholly owned subsidiary that retains separate liability but is treated as part of the S corp for tax purposes.
2. Holding Company Structure: Some businesses form a holding S corp that owns multiple LLCs for separate lines of business. This approach centralizes management while isolating risk.
3. Joint Ventures: Instead of forming a subsidiary, an S corp may enter into a joint venture LLC with another entity, sharing ownership and profits according to the agreement.

Each option offers varying degrees of tax efficiency, liability protection, and administrative complexity. Evaluating long-term goals and consulting with a legal or tax advisor can help determine the best structure for your situation.

Frequently Asked Questions

1. Can an LLC own an S corporation?
   No. An LLC cannot own an S corporation because S corp shareholders must be individuals, certain trusts, or estates—not business entities.
2. Is it better for an S corp to own an LLC or another S corp?
   It depends on your goals. An LLC provides more operational flexibility and asset protection, while a Qualified Subchapter S Subsidiary (QSub) simplifies taxes but offers less separation.
3. Does owning an LLC affect an S corp’s tax status?
   Not if structured correctly. The S corp’s status remains intact as long as the LLC doesn’t have ineligible owners and profits are reported properly.
4. Can an S corp-owned LLC have employees?
   Yes. The LLC can hire employees and manage payroll under its own Employer Identification Number (EIN), even though it’s owned by the S corp.
5. Why would an S corp form multiple LLCs?
   Many S corps form multiple LLCs to isolate risk, manage separate business activities, or hold specific assets such as real estate or intellectual property.

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