1. What is an LLC Subsidiary?
2. Creating a Subsidiary LLC

An LLC subsidiary is a smaller company that uses the same structure as the parent LLC. 

What is an LLC Subsidiary?

Organizing a business as an LLC subsidiary can be a very good decision. Traditional limited liability companies (LLC) are hybrid businesses that have features similar to partnerships and corporations. By using a subsidiary, your LLC can grow while still being able to use the parent LLC's organization. State laws recognize LLCs while treating them differently from corporations, sole proprietorships, and partnerships.

There are two main benefits of forming an LLC:

  1. Being able to protect member assets from business debts.
  2. Being treated as a disregarded entity, resulting in pass-through taxation.

If you're thinking about expanding your LLC into a new market, creating a subsidiary LLC can be a good idea. This allows you to focus your efforts on this new market while also promoting your subsidiary LLC as a separate entity from your main company.

Using a subsidiary LLC can also help protect your company. When you spread your assets among multiple entities, it can lessen the likelihood that all your assets will be taken in a lawsuit claim. Lawsuit claims are restricted to whatever assets are possessed by a single LLC, meaning that if your subsidiary LLC loses a lawsuit, the assets of the parent LLC will be protected.

Subsidiary LLCs are owned in part by the parent LLC. Generally, at least 50 percent voting stock of the subsidiary LLC will be owned by the parent LLC. Subsidiary LLC have the same limited liability protections and pass-through taxation benefits as a traditional LLC. LLCs that choose to use subsidiary LLCs may have a much easier time expanding. 

Creating a Subsidiary LLC

If you're interested in setting up a subsidiary LLC, it's a good idea to learn a few of the most important steps. Luckily, you should be easily able to set up a subsidiary LLC. The process for forming a subsidiary LLC is just as easy as the process for forming a parent LLC.

First, you need to name your subsidiary LLC. The name you choose should not already be in use by another business. Like traditional LLCs, the name of your subsidiary LLC must include a designator:

  • Limited company
  • LLC
  • LC

If your Secretary of State maintains a business name database, you can perform a search of this database to make sure you can use the LLC name you have chosen. While you can choose a name for your subsidiary LLC that is similar to the name of your parent LLC, this is not required.

The next step to forming your subsidiary LLC is acquiring an Articles of Organization form. Most Secretaries of State allow you to download this form online.

Once you've downloaded the Articles of Organization form, you should fill it out based on the rules of your state. When you are listing the members of your subsidiary LLC, you should be sure to name your parent LLC. In some cases, the parent LLC will be the only member of the subsidiary LLC. However, the parent LLC may also simply have an ownership interest.

Your Articles of Organization will need to include several important pieces of information:

  • The identities of your company members
  • The name of your subsidiary LLC
  • The company's address
  • The contact information of your registered agent

You can use your parent LLC's documents as a guide when filling out the Articles of Organization for your subsidiary LLC. When you've filled out your Articles of Organization, you will need to sign the document. Make sure that you are signing as a parent LLC representative instead of an individual.

You will now need to write an operating agreement for your subsidiary LLC. This document is not a requirement but can help you easily resolve future company disputes, including those related to company debts and ownership.

The main purpose of your operating agreement is to outline how your subsidiary LLC will be run. Information to add to your operating agreement includes:

  • The formation structure of your business
  • Your member's ownership percentages
  • How your company will be managed
  • Responsibilities of company members
  • A method of dissolving the company or adding new members

Once you've prepared your formation documents, you should file them with your state.

If you need help forming an LLC subsidiary, you can post your legal needs 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.