Subsidiary LLC: Everything You Need to Know
A subsidiary LLC is a limited liability company, or LLC, that exists under another limited liability company.3 min read
A subsidiary LLC is a limited liability company, or LLC, that exists under another limited liability company. Some people encourage business owners to set up subsidiary LLCs beneath the initial formation of an LLC to manage different businesses.
Can an LLC Own Another LLC?
From the legal side, an LLC can own another LLC. The owners of an LLC are referred to as members. The laws around LLC formation don't restrict who can become a member of an LLC. Therefore, a member can be an individual person or a business entity, including another LLC or a corporation. A single-member LLC can also be owned by another LLC.
The structure of parent and subsidiary business entities exists when an LLC, referred to as the parent, owns at least one other LLC, referred to as the subsidiary. Determining if this structure is a good fit for your business depends on the type of business risk exposure and how willing you and any other LLC members are to take on more administrative work.
Why Would an LLC Own Another LLC?
When a business has multiple lines, the owners might choose to create a parent LLC and at least one subsidiary to minimize the business risks. An LLC provides liability protection, so creating multiple subsidiaries reduces the risk of failure if one part of the business doesn't succeed. A business owner might also choose to form a parent and subsidiary business structure to minimize the burdens of operating and owning several LLCs. Another reason to form an LLC with separate subsidiaries is to move into new markets and expand into additional business ventures.
Some of the industries with higher risk include:
- Film production
- Real estate development
- Real estate investing
Business owners in these industries often choose to form multiple LLCs, structured in parent and subsidiary companies. Some businesses have more risk in their operations, such as construction firms. In order to mitigate some of that risk, a company owner might form a parent LLC, plus multiple subsidiaries to manage and hold assets, oversee operations, and manage the administrative tasks.
For example, a real estate investor owns three different apartment buildings. Owning these buildings comes with a higher risk of legal action by tenants and others who visit the properties. The apartment buildings also come with a risk of failure, such as if you can't rent them out or a fire destroys the structure. In order to prevent the issues of one building from impacting the other two, you might opt to form parent and subsidiary LLCs.
The parent LLC might handle the administrative tasks, while the three subsidiaries could own and operate each of the apartment buildings. All three of the subsidiary LLCs would be formed as single-member LLCs and the parent LLC would be the owner of each.
This structure could benefit you if someone was injured at one of the apartment buildings and takes legal action. The lawsuit could cause serious problems for one building, causing the subsidiary LLC that owns it to lose its money and assets. However, the other two subsidiaries and the parent LLC would be protected from liability because they are separate entities.
As you consider the benefits of a parent and subsidiary LLC structure, decide whether maximizing protection of business assets or minimizing expenses and administrative tasks is more important to you. Any LLC owner with a parent-subsidiary structure must have adequate insurance coverage for protection.
Disadvantages and Limitations of Parent and Subsidiary LLCs
One of the disadvantages of forming and operating more than one LLC is the time commitment. It is more time-consuming to run multiple businesses. It also costs more money to form and operate several LLCs. When you form an LLC, you must prepare and file the articles of organization with the proper state agency. Most LLCs also have operating agreements in place. All states require the payment of an LLC filing fee at formation. When forming multiple LLCs, you would have to file the required forms and pay the filing fee for each.
In order to prevent confusion, each of the LLCs would need its own bank account and to maintain its own tax, payroll, and financial documents.
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