An S corp can own up to 100 percent of 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. For example, if you own a landscaping business that is structured as an S corp and want to expand into the plant nursery business, you can form a second S corporation for the subsidiary business with your original S corp as the sole shareholder. This protects the original S corp from liability if the subsidiary is sued or becomes a financial failure.
State laws vary, but in most, an LLC may have any number of members who can be individuals, S Corps, C Corps, other LLCs, and even foreign entities. While an S Corp’s profits must be divided proportionally to each shareholder’s ownership interest in the company, an LLC’s profits may be distributed disproportionately if its operating agreement declares so. In theory, an S Corporation could own 100 LLCs if it doesn’t have any other shareholders. In the case of a single-member LLC, the member is considered the S corp owner, not the LLC itself. Because estates are allowed to own shares in S corporations, the business entity does not immediately disintegrate upon an owner’s death as a standard LLC does.
The Process for an S Corporation Owning an LLC
One LLC can fund another LLC either via an equity investment or a loan. The shareholders must be individuals, trusts, tax-exempt organizations, or estates and the individuals must also be citizens of the United States. An S corporation can own an LLC by following the same process that a natural person would in order to file and register an LLC in a state of their choosing. To do so, the S corporation must engage a local registered agent and provide the necessary supporting documents, including information on the member of the LLC being formed. In this case, the member of the LLC being formed would be the S corp.
The owners of a limited liability company (LLC) are called members. Each member is an owner of the company. An LLC is formed in a state by filing Articles of Organization or similar document in some states. If the LLC has just one owner, it will be taxed as a sole proprietorship. As a member of an LLC, either a single member or one of the multiple members in the business, you are a business owner, not an employee of your company. So, if you are one of 3.65 MILLION S Corp firms, you absolutely can own LLCs. There is absolutely no issue with the “S Corp owns LLC” thing. It is totally legal.
Benefits of an S Corp Owning an LLC
The LLC as a disregarded entity will determine liability protection and tax implications. Legal protections of LLCs and S-corps can vary among states. Asset protection limits liability. It is important to consult a qualified attorney in the state you plan to organize.
LLCs allow for liability protection. Creditors cannot go after personal assets. LLCs provide protections but can be simpler to operate than corporations.
An LLC offers protection from personal liability for business debts and lawsuits. LLCs allow for flexibility and tax efficiency. From a tax perspective, an LLC is a pass-through entity.
S Corps must meet criteria to qualify for tax treatment. Being taxed as an S corp has advantages over an LLC, including pass-through taxation and distribution flexibility. S Corps require a lot of paperwork to maintain status. An LLC provides protections but requires fees and oversight.
Consider risk, assets, and owners when deciding between an LLC and S Corp. Use LLCs and S Corps together to maximize legal and tax benefits. Forming an LLC without S Corp status misses out on tax savings.