Can an LLC Own Another LLC?

Can an LLC own another LLC? This question often comes up when business owners and planners are considering business structuring options. And the answer is yes. Limited liability companies can be parents and subsidiaries of one another, assuming all of the basic requirements of forming an LLC are met.

But there are some important things to consider before taking this step. An LLC attorney can help you navigate these sometimes complex waters.

What Are the Benefits of an LLC Owning Another LLC?

Although owning subsidiary LLCs with a parent LLC is complex, the benefits of this structure far outweigh the drawbacks in many business ventures. Some of the main advantages of choosing this route include:

Increased Asset Protection

LLCs are a great way to protect personal and business assets. The basic setup of the limited liability company protects your assets, and by owning one or more LLCs through a parent LLC, you can also protect your business assets.

For example, suppose that you own an LLC and want to protect your current business assets from losses due to a risky business venture. You can run the risky business venture through a subsidiary LLC that is owned by your current LLC. If the risky business venture goes awry, only the assets of the subsidiary LLC will be vulnerable.

Robust Liability Protection

Owning a parent LLC with one more subsidiary LLC can also provide great liability protection from potential lawsuits. For example, if you have a subsidiary LLC that causes an injury, that LLC might face:

• A personal injury lawsuit;
• An insurance claim for compensation;
• Fines and penalties.

But only that particular subsidiary LLC will be on the hook, not the LLC parent company or the other subsidiary LLCs. Each LLC member of the parent LLC is also protected from claims and lawsuits against subsidiary companies as well as those against the parent company.

Flexibility in Management

Many businesses choose to own subsidiary LLCs with a parent LLC because doing so allows a certain flexibility in management, which in turn helps fuel growth.

For example, with multiple LLCs under the umbrella and management of a parent company, the company's management can efficiently expand its operations by using the most appropriate subsidiary LLC without risking the assets of the other subsidiary LLCs and the parent LLC.

Downsides of an LLC Owning Another LLC

Every choice you make in business has a downside. When it comes to owning an LLC through another LLC, there are a few potential drawbacks that every business owner must consider. You must weigh the following drawbacks against the advantages before making a decision.

Increased Complexity

Any time you create or add a new business to your operations, the complexity of your overall business dealings is likely to increase, and you must devote more time and resources to the new venture. That's why it is important to take the time to review your operation and determine whether the added cost and complexities of purchasing or forming a subsidiary LLC is worth it.

Potential Tax Complications

For each new limited liability company you form or buy with your parent LLC, you will have separate tax requirements and paperwork to deal with. Although LLCs offer significant tax benefits, such as pass-through taxation, you must be aware that complications can arise when you have one LLC that owns one or more others. For this reason, having an experienced business attorney working for you is recommended.

Additional Administrative Burdens

Be prepared to deal with increased administrative burdens if you use an LLC to purchase one or more other LLCs. This translates into more money and time devoted to the administrative necessities of each LLC. But if you are truly interested in business growth and expansion, then you will find that your administrative costs increase no matter which avenue you choose.

How Can One LLC Own Another?

Now that you know that an LLC can own another LLC, you should understand that there are a few different ways this ownership can occur. Which method is right for you depends on the unique needs and goals of your business.

Parent-Subsidiary LLC Structure 

Outright ownership of a subsidiary LLC through a parent company LLC is a common way to have ownership of an LLC. This option is often chosen due to the flexibility of LLC ownership laws regarding who or what types of entities can own LLCs.

Businesses that choose this option typically use the parent company to conduct business of its own at the same time that the subsidiary LLCs engage in their respective business operations.

Holding Company Structure

Structurally speaking, there is no real difference between parent and holding company LLCs. But there is one main functional difference: Holding company LLCs do not conduct business whatsoever. They simply exist as a sort of placeholder, acting as an umbrella LLC for one or more subsidiary LLCs.

Tax Treatment for LLC Holding Company

The tax treatment of an LLC holding company is also the same as the tax treatment given to parent LLCs. Both enjoy pass-through taxation, which means they don't pay corporate income tax.

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Series LLCs

Certain states offer what is known as a series LLC. A series LLC is like a holding company, but it has fewer fees and less paperwork. It is created by forming somewhat independent divisions, also known as series, within an umbrella LLC. Each of these series corresponds to a separate subsidiary LLC.

Benefits of a Series LLC

The main benefit of choosing a series LLC over other methods of LLC membership is the reduced paperwork requirements. With a series LLC, you do not have to file separate articles of organization for each subsidiary LLC.

Are Series LLCs Offered in New York State?

As of 2023, series LLCs are not offered as an option within the state of New York. States in which businesses may choose a series LLC are:

• Alabama
• Arkansas
• Delaware
• Illinois
• Indiana
• Iowa
• Kansas
• Missouri
• Montana
• Nebraska
• Nevada
• North Dakota
• Oklahoma
• South Dakota
• Tennessee
• Texas
• Utah
• Virginia
• Wyoming

If you are operating within the District of Columbia or Puerto Rico, you may also choose to use the series LLC option.

Tax Issues to Consider

Since LLCs are considered pass-through or disregarded entities, profits are taxed based on the individual tax returns of the LLC's members.

Suppose you have a parent company as the sole owner of two LLCs. The parent company, as the owner of the LLCs, will be responsible for the taxes on the profits generated by the LLCs.

However, the parent company, being an LLC as well, will not pay taxes on the reported earnings. Instead, the owners (members) of the parent LLC will pay taxes on the earnings when filing their personal income tax returns.

Keep in mind that the parent company can elect to be taxed as a corporation instead of as a disregarded entity. For example, a parent LLC may choose to be taxed like a C corporation, which will lead to higher taxes (taxes will be levied at the business level and on the personal income tax returns of members).

However, the benefits of choosing a C corp, which include allowing LLC owners to be classified as employees of the business, may outweigh the tax liability. At Lawyer For Business, we'll help you explore LLC ownership options and determine which choices are better for your setup and objectives. Speak with an attorney for help with your specific situation.