Business owners generally want to protect their personal assets from claims, lawsuits and certain other business liabilities associated with their business. That’s why when a serial entrepreneur adds another business to his or her portfolio, forming another separate legal business entity is typically the action taken.
While owning multiple business entities is often advisable, doing so means the business owner may face additional administrative costs, professional fees, taxes, and state/local filing fees. Faced with these additional administrative burdens and costs, many business owners attempt to reduce such extra expenses and believe using a Series of Limited Liability Companies (Series LLC) or establishing an LLC as the holding company of other LLCs, S Corporations, or C Corporations is the beneficial approach.
But careful consideration should be given before proceeding because the formation of a multi-layered business entity structure will have legal, administrative, federal tax, and state tax implications. And in some instances, certain combinations of business entities may not be permissible by state statute and/or state and federal tax law. Nevertheless, exploring whether an LLC can own another business entity is a worthwhile exercise.
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Can an LLC Own Another LLC?
Yes. There are two ways in which an LLC may own another LLC:
- An LLC may own multiple, single-member LLCs—this is called a holding company structure; or
- An LLC may serve as the master entity and own a series of LLC cells, should state statute offer this option.
Holding Company LLC
When an LLC is formed and is designated as the owner of other single member (operating) LLCs, the holding company LLC files a single tax return which reports all income and expenses from all of the operating LLCs. This multiple business entity structure, if properly formed and maintained, offers business owners limited liability protection from certain claims, lawsuits, and liabilities associated with owning and operating their business.
When a single LLC serves as the master and owns a series of LLCs, it is known as a Series LLC. Each LLC in the Series is referred to as a cell. It is important to note that the Series LLC, as a form of a multiple business ownership, is not permissible in all 50 states. In recent years, less than one-half of the 50 states have granted business owners permission to use the Series Limited Liability Company.
In the eyes of state statute, if available, a Series LLC is only one entity. This is an important distinction from the LLC holding company structure. If a Series LLC is available in the state your business is created, each LLC cell must maintain its own bank accounts, accounting records (income statement, assets and liabilities) and may have different members and managers.
Depending on your state’s rules, it may be possible to file a single set of tax returns for the series of LLCs, assuming the tax treatment (by election) and ownership structure is identical across all LLCs in the series. This ability is truly state-dependent.
The IRS is catching up with this new interest in the Series LLC multiple entity structure by issuing in 2010 Prop. Regs. Sec. 301.7701-1. In plain speak and through the proposed regulations issued in 2010, the IRS offered some guidance for business owners about how the Series LLC master and its LLC cells will soon be treated for federal tax purposes. The examples offered in the proposed regulation suggest that despite the fact that a Series LLC is a single business entity in the eyes of the State in which it is formed, the Series LLC master and each LLC cell may be treated differently when it comes to filing its respective federal tax return.
Caution should be taken if considering the formation of a Series LLC especially if the proposed business will be active across state lines, as not all states recognize the Series LLC. It may be very difficult, if not impossible, to preserve the limited liability fences within each LLC cell in states which do not recognize the Series LLC. Furthermore, very little guidance is available to business owners about how employment taxes and related employee benefit regulations would apply to the Series LLC.
Can an LLC Own an S Corporation?
No. Shareholders in an S Corporation may only be one of the following: An individual, certain trusts or an estate.
Can an LLC Own a C Corporation?
Yes. A Corporation may be owned by an LLC, however when the corporation is formed at the State level, a natural person must be designated as the corporation’s organizer.
If an LLC owns a C Corporation, it’s important to understand that the IRS will regard the C Corporation separately for federal tax purposes. The C Corporation is required to file a Federal Form 1120 Corporate Net Income Tax Return each year and pay its own taxes. Any dividends paid to its owner(s), including the LLC, would be reported as income on the LLC’s federal tax return.