Can an S-Corp Own an LLC? The Definitive Answer
Wondering if an S-Corp can own an LLC? The short answer is yes, absolutely.
Many business owners use this option to protect different parts of their business or expand in new markets. When structured correctly, it can also potentially provide tax benefits. Here's everything you need to know about an S-Corp owning an LLC!
What Is an LLC?
A Limited Liability Company (LLC) is a business structure. It combines some of the best and more flexible aspects of a sole proprietorship with the strong liability protection of a corporation. It protects your personal assets from business debts and lawsuits. 43% of small businesses classify as LLCs.
✓Personal asset protection
✓Flexible tax options - choose to be taxed as a sole proprietorship, partnership, or corporation
✓Less paperwork and simpler management than corporations
✓Freedom to distribute profits however you choose
What Is an S-Corp?
An S-Corporation status is a tax election that both corporations and LLCs can choose. So, it's not a business entity, it's a tax treatment status. When you elect S-Corp status, your business income passes through to your personal tax return, similar to an LLC (but with some additional tax advantages).
✓Pass-through taxation to avoid double taxation on corporate income
✓Potential tax savings on self-employment taxes
✓Added credibility with clients and vendors
✓Clear structure for ownership and management
Learn more about the pros and cons of S-Corps.
LLC vs. S-Corp
Both LLCs and S-Corps are popular with small business owners, but it's a common misconception to think about them as mutually exclusive.
An LLC is your business's legal structure. An S-Corp is a tax classification.
LLCs are popular with small business owners because they're simple to set up and run. If you're just starting out or running a straightforward business, an LLC might be all you need. You get solid liability protection without a lot of paperwork or complex rules to follow, so it can work well for many freelancers and small business owners.
S-Corps often appeal to business owners who want to save on self-employment taxes. You can choose for your LLC to be taxed as an S-Corp.
Why? Well, in an LLC, all your business profit is typically subject to self-employment tax. But with an S-Corp, you can pay yourself a reasonable salary and take additional profits as distributions. You have to pay self-employment taxes on your salary, but not on the distributions, which can save you a lot of money.
Learn more about LLCs vs. S-Corps and the potential benefits of your LLC electing the S-Corp status for federal income tax purposes!
Can an S-Corp Own an LLC?
Yes, an S-Corporation can own an LLC.
When this happens, the LLC becomes a subsidiary of the S-Corp. The S-Corp acts as the "parent company" and can own all or part of the LLC, just like any other business asset. This kind of arrangement is completely legal and fairly common.
Why Would an S-Corp Own an LLC?
There are a few practical reasons why business owners choose to have their S-Corp own an LLC.
Protecting Different Business Lines
Let's say, hypothetically, you run a successful property management company structured as an S-Corp. You decide to start buying rental properties. Instead of holding these properties in your S-Corp, you could create an LLC owned by your S-Corp to hold the real estate.
This way, if something goes wrong with a property, your management company's assets stay protected. It's a good way to expand your small business corporation. You should also learn about important tax considerations for real estate agents.
Managing Risk
Here's another example of how an S-Corp owning an LLC can help protect valuable assets. If you own a chain of restaurants or retail stores, you can set up separate LLCs for each location, all owned by your S-Corp. If one location faces a lawsuit, the others remain protected. This arrangement helps contain potential problems to just one part of your business.
Expanding to New States or Markets
If you're growing your business into new states or markets, having your S-Corp own separate LLCs can simplify things. Each state has different rules and tax requirements. Setting up local LLCs owned by your main S-Corp can make it easier to comply with state regulations.
Separating Assets
Some business owners use this structure to keep valuable assets separate from day-to-day operations. For example, if your business owns expensive equipment or vehicles, you might put these in an LLC owned by your S-Corp. This creates an extra layer of protection.
Can an LLC Own an S-Corp?
In most cases, no.
Typically, an LLC can't own an S-Corp, but there's one specific situation where it's possible: when you have a single-member LLC that's treated as a "disregarded entity" for tax purposes (meaning it's not taxed as a corporation).
If the LLC's owner meets all the requirements for S-Corp ownership, then the LLC can own shares in an S-Corp. But keep in mind that the requirements for S-Corp ownership are quite strict, and every S-Corporation shareholder must be a US citizen or resident.
FAQs
Can I Start Another Business Under My S-Corp?
Yes! You can start another business under your S-Corp, either directly or through a subsidiary LLC. Your S-Corp can operate multiple business activities or own other businesses. Just make sure to maintain clear accounting records for each of your businesses to streamline your tax reporting since all of your income will flow through the S-Corp's tax return.
Can I Have Multiple Businesses Under My S-Corp?
Yes, you can operate multiple businesses under one S-Corp. You can do it directly under the S-Corp or create separate LLC subsidiaries. For high-risk activities, creating an LLC that your S-Corp owns can give you an extra layer of protection.
Can an S-Corp Own 100% of an LLC?
Yes, an S-Corp can own 100% of an LLC. This arrangement could be useful when you want to separate certain assets or operations from your main business while keeping everything under one tax umbrella. There can also be multiple LLC members (known as a multi-member LLC).
Can an S-Corp Contribute Assets to an LLC?
Yes, your S-Corp can contribute different assets to an LLC that it owns, including cash, equipment, vehicles, or real estate. These contributions are typically tax-free when the S-Corp maintains ownership control of the LLC. Many business owners use this strategy to separate valuable assets from their main business operations. Just be sure to properly document everything and maintain records of ownership.
How to Create an LLC Under an S-Corp?
First, you'll need to register the LLC with your state's business filing office, similar to forming any other LLC. The only difference is that you'll list your S-Corp as the owner (member) of the LLC on the formation documents. You'll need to get a separate EIN for the LLC from the IRS, but the LLC's income will typically flow through to the S-Corp's tax return.
Should an S-Corporation Own an LLC? The Best Option for Your Business
An S-Corp owning an LLC makes the most sense when you need an extra layer of liability protection for your business activities and valuable assets. It can also be a good idea when you're expanding into new markets.
If your small business is growing, setting up LLCs within your S-Corp can be a smart way to reflect that evolution. And Desi Tax Service® can help you make sure that your taxes and bookkeeping are working with you, not against you. Learn more about our services!
