People or other businesses can own limited liability companies (LLCs), including corporations. Why might a corporation own an LLC?
Several reasons are laid out in this guide to help you choose the best approach for you and your business.
The Structure of LLCs
An LLC is a popular business structure for startup companies due to its many benefits. An LLC provides personal liability protection, for example, so that your assets are not at risk if your business is sued or cannot pay its debts.
Also, an LLC is a “pass-through entity” in taxes, meaning that the LLC itself is not taxed. Instead, income passes through the company to the LLC owners or members, who report it on their tax returns on Schedule C.
LLCs also offer flexibility in management, as there are few requirements regarding organizational structure.
LLC member ownership is defined in the operating agreement as a percentage or units representing a certain percentage. Usually, the members have contributed capital to the company or have ownership of other contributions, such as the work they do for the company.
The percentage of each member’s ownership is usually based on the amount of their contribution, but it can be allocated in any way members agree upon. The operating agreement will also specify profit allocations and members’ voting rights, roles, and responsibilities.
Members of the LLC can be individuals, corporations, or other LLCs.
Why Would a Corporation Own an LLC?
The most common scenario for a corporation owning an LLC is when the corporation is a holding company to own other businesses. A holding company, or parent company, is a business entity with no business operations.
Instead, it maintains a controlling interest (more than 50%) in a company or companies, often known as subsidiaries, that do have business operations. The subsidiaries have their management, while the holding company oversees those managers.
The holding company can obtain financing for the subsidiaries and receive income from them. The holding company, whether a corporation or an LLC, offers an added layer of financial protection, as the obligations of a subsidiary do not affect the holding company or other subsidiaries.
A corporation can also become an LLC owned by acquiring the LLC or purchasing a controlling interest.
Taxation of the Member Corporation
Again, LLCs have pass-through taxation, which means that the LLC-member corporation’s share of profits must be taxed as corporate income and subject to corporate taxes. In addition, corporation shareholders are also taxed on dividends they receive from the corporation, which is sometimes called double taxation.
Holding companies are often LLCs instead of corporations to avoid double taxation.
When a Corporation Cannot Own an LLC
There are two situations in which a corporation cannot be an LLC member. First, if the corporation is a bank or insurance company, it cannot be a member because banks and insurance companies cannot be LLCs.
Also, a professional limited liability company (PLLC) cannot be owned by a corporation because PLLC members must be state-licensed professionals, such as doctors or attorneys.
In most situations, a corporation can own an LLC. If you’re forming a holding company for other businesses that you plan to start or acquire, you can choose a corporation or an LLC for your holding company. It’s a good idea to talk to your tax advisor to find the best option.