Can an S Corporation Own an LLC: Everything You Need to Know
Can an S corporation own an LLC is a common question, and the short answer is yes.3 min read
2. S Corp Advantages Over LLC
3. LLC Advantages Over S Corp
Can an S Corporation Own an LLC
Can an S corporation own an LLC is a common question, and the short answer is yes. An S corp can own up to 100 percent of an LLC. The same isn’t true for the S corp. An LLC cannot be an owner in an S corp. What’s more, any type of business cannot be an owner in an S corp.
While there are greater restrictions in terms of ownership in an S corp, there are fewer restrictions on who can hold ownership in an LLC. Although LLC ownership varies from state to state, most entities and individuals can be owners in an LLC.
Since the LLC operates as a pass-through entity for tax purposes, the profits and losses of the LLC will pass through to the S corp if the S corp is the single owner in the LLC. However, if the S corp is one of many owners in an LLC (multi-member LLC), then the LLC is treated as a partnership. Therefore, the income of the LLC is taxed as a partnership in the hands of the owners. But if the LLC elects to be taxed as a corporation, then it will file its own separate corporate tax return.
S Corp Advantages Over LLC
While there are similarities and differences between the S corp and LLC, there are some advantages that the S corp has over an LLC, including the fact that S corps aren’t legally different from C corporations, meaning that the S corp still enjoys the many corporate benefits that come with operating a corporation but avoids the double taxation implication imposed on C corporations.
Some of the many benefits of operating a corporation include the following:
- Ability to issue stock
- Shareholders can easily transfer ownership by selling shares to someone else
- Perpetual existence, as corporations need not worry that the business will be terminated just because a shareholder wants to leave the corporation, sell his or her shares, becomes disabled, or dies
- Tax-free fringe benefits, i.e., life insurance, medical insurance, stock plans, retirement plans, travel deductions, etc.
Keep in mind that, as previously noted, the corporation has an unlimited lifespan. LLCs generally exist for a period of time. In fact, some states provide that an LLC can only operate for a period of 30 years maximum. Furthermore, most LLCs will automatically terminate if an owner (member) becomes disabled, dies, goes bankrupt, gets a divorce, or wishes to sell his or her membership interest in the LLC. Another benefit of the S corp over an LLC is the fact that it can pay its profits to owners in the form of compensation (if the shareholder is an employee of the business) as well as dividends.
LLC Advantages Over S Corp
While there are many advantages of an S corp over an LLC, there are also some unique features of the LLC that are advantageous and could be a reason why some businesses might wish to form an LLC rather than an S corp. Some of these features include the following:
- The LLC is less expensive to form
- There is less documentation required when forming an LLC
- There are fewer formalities and requirements for an LLC, as there are fewer documents required each year when operating an LLC
- The owners of an LLC, also referred to as members, aren’t restricted in terms of citizenship. An S corp, however, requires that the owners be either a U.S. citizen or permanent resident
- There can be an indefinite number of LLC owners whereas an S corp allows 100 shareholders at most
- There is greater management flexibility in an LLC, as the owners can either manage the LLC themselves or hire a third party to oversee the operations of the business
- LLCs don’t use a profit distribution in terms of membership percentage. This means that someone who might have less ownership than another could earn more money if he or she puts in additional work, i.e., works more hours, provides additional ideas for the company, etc.
If you need help learning more about whether or not an S corporation can own an LLC, or if you are interested in forming an S Corp or 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.