YES, it’s possible for an S Corp to own an LLC. But should you? Read on to find scenarios when this business structure best works.
Most of the entrepreneurs after their initial research prefer LLC or Limited Liability Company. The personal asset protection, pass-through income, and reduced paperwork are some of the most common reasons why most entrepreneurs prefer the LLC structure.
But look carefully, and you will see that almost similar benefits are also available with the S Corp structure.
After understanding both the business structures, a lot of entrepreneurs wonder whether it is possible for an S Corp to own an LLC? Or, can an LLC own an S Corp?
If you want to know the same, you have reached the right place. In this post, we will try to understand both of these business structures and see whether they can own one another.
S Corp vs. LLC
While both, S Corp and LLC, are known to offer almost similar benefits, there are some considerable differences between the two.
For instance, LLC is a state-level business entity which files state taxes. On the other hand, an S Corp is similar to a standard Corporation or C Corp, and it files federal taxes. This also means that S Corps get to enjoy many Corporate structure benefits such as stock offering, perpetual existence, and some tax-free benefits.
LLCs do not get these benefits. LLCs have a defined lifespan, and in some of the states, an LLC can only exist for up to 30 years. But registering an S Corp is more complex and expensive than forming an LLC.
Also, there is no restriction on the total number of members or owners an LLC can have. Even the citizenship of the LLC members is not restricted. This makes it easier for LLCs to attract foreign investors.
So, Can an S Corp Own an LLC?
Yes, it is possible for an S Corp to own an LLC. While the ownership requirements vary between states, in most cases, an S Corp can own an LLC by becoming its member or owner.
Now, an important question here is what about the taxation of an LLC which is owned by an S Corp?
LLCs are pass-through tax entities. The business income passes through the owners who then file the taxes along with their personal income tax. If an S Corp has a single owner and the LLC it owns has not elected Corporate taxation, the LLC’s taxation will be similar to that of a disregarded entity. The LLC income in such cases will pass through the S Corp for taxation.
But if the S Corp has more than one owner, the LLC it owns will be a multi-member LLC. In such cases, its taxation will be similar to that of a partnership. The owners will pay taxes on the business income as per their ownership share in the business.
If the LLC elects Corporate taxation, it will have to file its own taxes separate from the owners.
Can an LLC Own an S Corp?
In most of the cases, it is not possible for an LLC to own an S Corp. This is mostly due to the strict S Corp requirements of the IRS which makes most LLC owners ineligible to own an S Corp. But in some cases, a single-member LLC can be an exception.
If it is a multi-member LLC, it will have to elect between partnership and Corporate taxation. Both of these entities cannot own any interest in an S Corp. But if an LLC is a single-member LLC which has not elected Corporate tax structure and if the single owner of the LLC is eligible for owning an S Corp, it is possible for that LLC to own an S Corp.
Why Do S Corps Own LLCs?
As the tax treatment of both of these business structures is similar, there is no tax benefit for an S Corp if it owns an LLC. But many of the S Corps still own LLCs due to the flexibility that the LLC structure offers.
For instance, in the case of an S Corp, the profits of the business are divided as per the ownership share of the owners. But with the LLC structure, the members can split the profits equally. A lot of times when an S Corp sees a new business opportunity and believe that owning a particular LLC is important to benefit from the opportunity, they consider owning the LLC.
Is it possible for an S Corp to own an LLC? In most cases, yes. But if you reverse the question, the answer is mostly no. A lot of things also depend on state laws. So, check with the Secretary of State’s office to know more about the laws in your state.
If you are an S Corp and want to own an LLC, ensure that you thoroughly understand the whole process. Go through the pros and cons of owning an LLC as an S Corp and only consider it if you are sure to experience some big business benefits.