Can an LLC Own an S-Corp?

If you’re preparing to form, or already have, a limited liability company (LLC), you may consider expanding by purchasing another company. It’s a common expansion strategy for many businesses. 

What if the company you’d like to acquire is an S-Corp? Does that complicate matters? Read on to learn when an LLC can and cannot own an S-Corp.

What Is an LLC?

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. 

What Is an S-Corp?

An S-Corporation is not a business entity type but a tax classification. An LLC can be taxed as an S-Corp if it meets specific IRS requirements. 

With S-Corp status, income passes through the business to shareholders or owners without being taxed as corporate income, just as in an LLC. However, in a regular corporation, also known as a C-Corp, the corporation is taxed, as are the dividends shareholders receive, sometimes referred to as double taxation.

Corporations and LLCs can be classified as S-Corp if they have 100 or fewer shareholders or members. In addition, s-Corp shareholders can only be individuals or specific types of trusts, estates, or tax-exempt organizations.

When Can an LLC Own a Company with S-Corp Status?

The IRS has specific rules regarding who can and cannot own an S-Corp. S-Corp owners:

• May be individuals, estates, or certain kinds of trusts
• They may not be taxed as partnerships or corporations
• May not be a non-resident alien shareholder

LLCs with more than one member is taxed by default as partnerships unless they have chosen to be taxed as an S-Corp or a C-Corp. Thus, per IRS rules, an LLC with more than one member cannot own an S-Corp due to its partnership or corporation status.

On the other hand, an LLC with one member is taxed as a sole proprietorship. IRS rules do not prohibit sole proprietorships from owning an S-Corp. Thus, an LLC with only one member can own an S-Corp.

Why Does the IRS Restrict S-Corp Ownership?

An S-Corp has pass-through taxation, so if an LLC owns a share of the S-Corp, S-Corp profits will pass through to the LLC. However, if the LLC has an owner who is not required to file U.S. taxes, that income would pass through the S-Corp, then through the LLC and to the owner, and would not be subject to taxation. 

Without this rule, someone could use an S-Corp to avoid taxation altogether.

So How Can I Purchase a Company with S-Corp Status?

If your LLC cannot own an S-Corp but is still interested in buying an S-Corp, you’ll have to make the purchase yourself. Like your LLC, the new company would still benefit from personal liability protection and pass-through taxation. You would own two separate business entities.

In Closing

If your LLC has just one member, it can own an S-Corp. Otherwise, it cannot. 

If you are purchasing another business, it’s essential to involve an attorney to ensure the deal is appropriately structured and the transaction is handled correctly – preferably in a way that benefits you and your business.