LLC owning another LLC is not only possible but it may even be advantageous if you’re looking to run a diversified business. This would be what’s referred to as a holding company structure. It enables a business owner to increase their liability protection so that if one part of the business fails, it doesn’t bring down everything else with it.
Setting it all up might seem a bit daunting, particularly if you don’t have any experience with such complex matters. This article will walk you through the steps so that you’re able to decide whether this structure would be beneficial for you and how you should go about bringing it all together.
Can an LLC Own Another LLC?
You can set up a Limited Liability Company and create subsidiary LLCs under that primary LLC. The legality of an LLC owning another LLC can be explained simply. There aren’t many restrictions on who can be the owner or member of an LLC. Therefore, an LLC’s members can either be an individual or another business entity such as an LLC.
An LLC’s ownership of another LLC can be made possible through the parent LLC and subsidiary LLC structure. This is one of the most commonly used methods due to the flexibility it provides. The parent LLC would conduct business activities while also owning a subsidiary company that engages in its own business.
An LLC may also be set up for the sole purpose of owning other LLCs. This is what’s referred to as a holding company structure. The primary difference here is that the LLC which serves as the holding company doesn’t conduct any business activities on its own. It exists primarily to own multiple LLCs under it.
Benefits of an LLC Owning Another LLC
There are several benefits of an LLC owning another LLC. For example, it provides additional liability protection to the primary LLC, enabling business owners to run diversified businesses that don’t jeopardize each other. Let’s take a look at the benefits here:
1. Limited Liability Protection
The Limited Liability Company business structure is preferred because of the liability protection it provides. Members’ personal assets are protected from the debts and liabilities of the business. Since an LLC can also be a member of another LLC, it can derive an additional layer of protection by virtue of its ownership.
For example, you can own several apartment complexes in separate LLCs under a primary LLC. Each of the separate LLCs would be a single-member LLC in which the parent LLC is the sole owner. This structure will ensure that any debts or lawsuits on one building don’t impact the rest of your holdings.
2. Separate Business Operations
It’s typically advantageous to split business operations into separate LLCs. Each entity will have its distinct operations with assets separate from the others. This can also be useful when you have an established business and want to consider diversifying into a new, potentially risky business venture.
By establishing a separate LLC for that new venture under the parent company, you can rest assured that regardless of whatever happens with that risky new business, the assets of your established LLC will remain protected. Any debts or liabilities will remain confined to that subsidiary company.
3. Tax Planning Strategies
You could potentially derive tax benefits by structuring your business like this. The quantum of the benefits available to you will depend on the tax structure and the jurisdiction. Ideally, the parent LLC may be able to offset the losses from one subsidiary LLC against the profits from another.
This will enable the primary LLC to reduce its overall tax liability. However, you need to consult with a tax professional about the potential benefits that may be available for you. It can get tricky managing tax matters in a structure like this, so ensure that you seek professional advice before proceeding.
Types of Ownership Structures
Now that you understand the legality of an LLC owning another LLC, let’s take a moment to look at the various ownership structures that can be utilized for such an arrangement. Each has its distinct advantages, so you should choose the one you feel would best suit your business needs.
1. Parent-Subsidiary Relationship
A common way to have ownership of an LLC through another Limited Liability Company is to opt for a Parent-Subsidiary LLC structure. The primary LLC owns at least 50% of the voting stock of the subsidiary.
This is a preferred option for many since the parent LLC can continue to carry on its business activities while also owning another LLC at the same time. However, it remains protected from the debts and liabilities of the subsidiary. So even if something were to go awry with the new business, the main LLC’s business wouldn’t be affected.
2. Holding Company Structure
A holding company structure is only slightly different in the sense that the main LLC is set up primarily to own other LLCs. It doesn’t carry out any business activities of its own.
Business owners can effectively exercise their control over all the subsidiaries through the holding company. Since it doesn’t have its own business, the holding company becomes easier to manage as well. Only general administrative tasks related to the formation and ongoing compliance for the subsidiary LLCs would be carried out.
3. Series LLC
Series LLCs are an effective management structure as well but they’re only available in a handful of states. Alabama, Arkansas, District of Columbia, Delaware, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nebraska, Nevada, North Dakota, South Dakota, Oklahoma, Tennessee, Texas, Virginia, Utah, and Wyoming currently recognize Series LLCs.
The structure consists of an umbrella LLC under which there can be one or more sub-LLCs or series. All the LLCs created under that umbrella are independent of each other. They have their separate assets, operations, and members. Series LLCs operate like holding companies but have simpler filing requirements and fewer fee obligations, which is one major advantage of this structure.
Practical and Legal Considerations
While setting up multiple LLCs is pretty straightforward, you should be mindful of the fact that it could end up being administratively challenging if you don’t have the right framework in place.
1. Managing Multiple LLCs
Running multiple LLCs at the same time is going to be time-consuming and costly. You’ll need to file all the paperwork for each subsidiary and pay the filing fee separately. Tax and compliance matters for each will also need to be dealt with separately. An annual report will need to be filed for every single one of those LLCs as well.
Develop sound organizational strategies so that you’re effectively able to manage them all. You wouldn’t want to spend all your time on administrative tasks, which could prevent you from growing the business. It would be best to consider hiring professional help for administrative matters so that your time isn’t wasted on mundane tasks.
2. Financial Management
All the LLCs under your parent LLC will require sound financial management. This begins with obtaining separate EINs or Employer Identification Numbers for them all since you can’t have multiple LLCs on one EIN. Bookkeeping and accounting for each LLC have to be separate as well.
You’ll need good financial planning skills to manage accounting, bookkeeping, and taxation matters across all the subsidiaries. Opt for software and other automated solutions wherever possible to save time and manage your companies effectively.
3. State Laws and Regulations
Before starting the process of setting up multiple LLCs, it would be best to look at the prevailing laws and regulations in your state. There tend to be differences among states when it comes to the ownership of multiple LLCs.
For example, there are still many states that don’t recognize a series LLC. So if you want to set one up, you’ll need to incorporate it in a state that identifies them, even if that’s not where you’re based. Most states will also require you to file annual reports and pay a fee. Factor that in your calculations as that would impact your ongoing costs for running multiple LLCs.
4. Operating Agreements
Don’t think that your parent LLC eliminates the need for appropriate paperwork for each LLC. You’ll need separate operating agreements for each one. It’s important to ensure clarity and understanding of the rights and responsibilities of all members, particularly if you have partners in your business venture.
A separate operating agreement for each LLC will bring clarity to the operations. It will also meet crucial compliance requirements as some states require operating agreements to be filed with the Secretary of State prior to incorporation.
Entrust Your Multiple LLC Formation to the Experts
There aren’t many restrictions on an LLC owning another LLC, so forming multiple LLCs can be beneficial if you want to diversify your business or increase liability protection. It can be administratively challenging, though, which is why you should rely on doola’s LLC formation service.
You’ll receive expert help for the incorporation process as well as ongoing support for compliance matters. This will free up your time to focus on growing the business.
Is it necessary to establish a separate LLC to own another LLC?
Yes, it is necessary to establish a separate LLC to own another LLC. Depending on what suits your business, you can either opt for a holding company structure where the new LLC exists only to own subsidiary LLCs or establish a parent LLC that also conducts its own business activities while owning subsidiaries.
How are ownership interests determined in an LLC owning another LLC?
The LLC operating agreement will typically detail how the ownership percentage will be quantified. It’s typically stated as units or shares.
Are there any tax implications when an LLC owns another LLC?
There could be potential tax benefits to draw when you own an LLC through another LLC. For example, the parent LLC could offset losses from one subsidiary with the profit from another. It’s important to consult with a tax professional to get an accurate representation of the benefits you could extract.
Can an LLC be both a parent and a subsidiary at the same time?
Yes, it’s possible for a Limited Liability Company to be a parent LLC and a subsidiary of another LLC, as long as all the primary requirements of forming an LLC have been met.
What happens if the parent LLC goes out of business or dissolves?
If the parent LLC is dissolved or goes out of business, it’s not likely that the subsidiary will survive. If the parent company is acquired, the subsidiary will be absorbed into the acquired company.