Key Takeaways

  • A subsidiary LLC is a business entity owned by a parent LLC and offers liability protection and tax benefits.
  • It allows for business diversification, asset protection, and brand separation.
  • A parent LLC can own multiple subsidiaries for operational or legal purposes.
  • Subsidiary LLCs can be structured as single-member or multi-member entities depending on ownership.
  • Filing requirements, tax elections, and operating agreements are key in setting up a subsidiary LLC.
  • States have varying rules regarding LLC ownership, so it's important to check local requirements.
  • You can find experienced attorneys on UpCounsel to help you structure and file your LLC documents properly.

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. 

Benefits of a Subsidiary LLC Structure

Forming a subsidiary LLC offers significant strategic advantages, especially for growing or diversified businesses. Some of the primary benefits include:

  • Legal Separation of Liability: Each subsidiary operates as a separate legal entity. This means liabilities, lawsuits, or debts incurred by one subsidiary generally do not impact the parent or other subsidiaries.
  • Streamlined Business Operations: If your business offers multiple services or operates in different regions, forming separate LLCs for each function can make management more efficient.
  • Brand Protection and Management: Each subsidiary can operate under its own brand name, making it easier to tailor marketing and branding strategies while maintaining parent company ownership.
  • Asset Protection: Valuable assets (e.g., real estate or intellectual property) can be isolated in separate subsidiaries to shield them from business risks.
  • Investment and Partnership Flexibility: Subsidiary LLCs make it easier to bring in minority investors or partners on specific ventures without affecting the ownership of the parent company.

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.

Tax Considerations for Subsidiary LLCs

Tax treatment for a subsidiary LLC largely depends on its structure and how the IRS classifies it:

  • Single-Member LLC Subsidiary: When wholly owned by one parent LLC, the IRS typically treats the subsidiary as a disregarded entity for federal tax purposes. All income and expenses flow through to the parent.
  • Multi-Member LLC Subsidiary: If other members besides the parent LLC are involved, the subsidiary is typically treated as a partnership and must file Form 1065.
  • Corporate Tax Election: A subsidiary LLC can elect to be taxed as a C corporation or S corporation by filing Form 8832 or Form 2553, respectively. This may be beneficial for subsidiaries expected to retain earnings or seek outside investment.

Keep in mind that even disregarded entities may need to file state-specific reports and pay state-level fees or taxes. Consulting a tax professional or business attorney is recommended for choosing the most beneficial tax classification.

Parent LLC as a Holding Company

When forming a subsidiary LLC, the parent LLC may act as a holding company. A holding company does not conduct its own business operations but owns controlling interests in other companies, typically to reduce liability and centralize management.

Key functions of a holding company structure include:

  • Centralized Control: The parent LLC oversees management decisions, while subsidiaries handle day-to-day operations.
  • Simplified Investment Strategy: Investors can invest in the parent holding company and gain exposure to multiple business segments through its subsidiaries.
  • Risk Management: Isolating liabilities within individual subsidiaries minimizes risk to the overall enterprise.

This setup is popular in real estate, franchising, and businesses with diversified product or service lines.

LLC Subsidiary vs. Series LLC

It’s important not to confuse a subsidiary LLC with a series LLC, though both offer compartmentalization.

  • Subsidiary LLCs: Each subsidiary is a separately formed entity with its own registration and operating documents. This structure offers legal separation across state lines but involves more paperwork.
  • Series LLCs: Available only in certain states, a series LLC is a single legal entity with multiple "cells" or "series," each with separate assets and liabilities. Only one filing is required, but not all states recognize the series structure.

Choose a subsidiary LLC structure when you want clear legal separation, especially across jurisdictions or when partnering with outside investors.

Alternatives to Forming a Subsidiary LLC

Before forming a subsidiary LLC, it may be worth considering alternatives, depending on your goals:

  • DBAs (Doing Business As): A parent LLC can operate under different names in various markets without forming separate LLCs. However, DBAs do not offer separate legal protection.
  • Divisions within the Parent LLC: Rather than forming a new legal entity, a company may establish internal divisions. This keeps everything under one legal umbrella but limits liability protection.
  • Joint Ventures: If collaborating with another business, forming a jointly owned LLC may be more practical than creating a wholly owned subsidiary.

Each approach has pros and cons in terms of liability, cost, and complexity. Legal guidance is essential to evaluate which structure suits your goals best.

Compliance and Ongoing Requirements

Once your subsidiary LLC is formed, maintaining good legal and financial standing is essential. Ongoing compliance includes:

  • Annual Reports and Fees: Most states require annual filings and fee payments for each LLC, including subsidiaries.
  • Separate Books and Bank Accounts: Keep financial accounts distinct between parent and subsidiary LLCs to maintain limited liability protection.
  • Tax Filings: Each subsidiary may have separate tax filing requirements, depending on its classification.
  • Operating Agreements: Maintain updated and comprehensive operating agreements for both the parent and the subsidiary to reflect ownership, responsibilities, and changes over time.

Failing to observe proper corporate formalities may result in piercing the corporate veil, which could expose the parent LLC to subsidiary liabilities.

Frequently Asked Questions

1. Can an LLC own multiple subsidiary LLCs? Yes, a parent LLC can own several subsidiary LLCs. This is common for businesses seeking to isolate risks or manage diverse operations.

2. Is it better to use a DBA or a subsidiary LLC? DBAs are easier and cheaper to set up but don’t provide liability protection. Subsidiary LLCs offer legal and financial separation.

3. Can a nonprofit organization create a subsidiary LLC? Yes, but the LLC must be wholly owned and controlled by the nonprofit to maintain tax-exempt status. Legal guidance is essential.

4. What are the tax implications of a disregarded subsidiary LLC? If the subsidiary is a single-member LLC owned by the parent, it's generally treated as a disregarded entity for tax purposes. All income flows to the parent.

5. Do subsidiary LLCs require their own EIN? Yes, most subsidiary LLCs need their own Employer Identification Number (EIN), even if wholly owned by the parent LLC.

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.