Can an LLC Own Another LLC? (All You Need to Know)
There are a lot of questions that business owners have when it comes to forming a limited liability company.
If you own a limited liability company and plan to expand your business, you have the option to create subsidiary LLCs under the existing company.
As a Mergers and Acquisitions specialist, businesses and entrepreneurs seek my guidance when forming LLCs and joint organizations. Together with our team of LLC experts, we'll share our insights on the benefits of owning a parent LLC and how it can help your business grow.
Quick Summary:
- An LLC can own another LLC by forming a parent or master entity and managing subsidiary businesses.
- The main advantages of this structure involve asset protection, tax efficiency, and business growth.
- The ownership dynamic within a Parent-Subsidiary LLC Structure is characterized by the parent LLC's significant influence, owning at least 50% of the subsidiary's voting stock, which underscores the parent's pivotal role in guiding the subsidiary's direction.
- From my perspective, the strategic formation of a Parent-Subsidiary LLC can be a game-changer for businesses aiming to expand their operations while maintaining control and reducing risk.
Can an LLC Own Another LLC?
Yes, an LLC can own another LLC by forming a parent company and managing subsidiary entities.
There are two ways – the parent-subsidiary LLC business structure and the holding company structure.
1. Parent-Subsidiary LLC Structure
The parent entity has the option to manage the subsidiary LLCs by taking part in day-to-day operations. It also provides asset protection and tax efficiency for the parent entity.
While this is true, I inform business owners that the subsidiary company is not a separate legal entity from the parent LLC. This means that the parent entity is responsible for the actions of the subsidiary company.
2. LLC Holding Company
Several businesses could be operated under a holding company which owns a controlling interest and performs administrative duties without actively participating in the day-to-day operations of its subsidiary LLCs.
It is responsible for making major business decisions and overseeing how the subsidiary companies are managed [1].
A holding company is a separate entity that owns all or a certain percentage of the subsidiary companies, it offers more flexibility and can be used in a variety of situations.
"Spend time upfront to invest in systems and processes to make lon-term growth sustainable."
- Jeff Platt, Businessman, President of the NOW Massage
Ultimately, the decision about which structure to use depends on the needs of your business. If you're not sure which structure is right for you, consult with an attorney or accountant.
What Types of Business Entities Can an LLC Own?
An LLC can own any business entity, including other LLCs, corporations, and partnerships. This allows owners to keep their businesses separate and organized.
To illustrate, a client of mine owns a restaurant and a clothing store, all of which are under a parent LLC. This helps protect the assets of each business in case of bankruptcy or litigation.
Additionally, LLCs can own real estate and other assets. This gives business owners more flexibility when it comes to their business ventures.
Multiple businesses can be run out of a single LLC, which can save on taxes and administrative costs.
How Does a Parent LLC Protect Its Subsidiaries?
The parent LLC protects its subsidiaries by setting up separate bank accounts for them and keeping the finances of each LLC isolated.
The members of the subsidiary LLCs are not liable for the debts or obligations of other subsidiary companies under the parent entity. This protection is especially important if the subsidiaries are in different states than the parent company.
However, it is important to remember that the subsidiary LLC is still its own entity and should maintain separate records and finances.
If you are considering setting up a subsidiary LLC, be sure to consult with an attorney to make sure you are taking all the necessary steps to protect your business.
Benefits of an LLC Owning Another LLC
The benefits of an LLC owning another LLC, especially in a market where 33.3 million small businesses make up 99.9% of US businesses, include significant asset protection, tax efficiency, and opportunities for business growth and diversity, according to the US Small Business Administration [2].
1. Asset Protection
The parent company and its subsidiaries possess unrelated assets in terms of liability.
As we mentioned earlier, if one of the businesses owned by the LLC were to go bankrupt or experience a lawsuit, the other businesses would be protected.
This is because each company is its own legal entity and has its own assets.
2. Tax Efficiency
Subsidiary LLCs do not pay taxes, instead, they are passed through to the parent company directly to your individual returns, as such, they are taxed as a single entity. This enables the company to simplify the filing process and monitor payments.
3. Helps with Business Growth
By having multiple businesses under one umbrella, business owners can more easily expand their operations.
Different lines of businesses can be managed, operated, and maintained separately without having to form a new company. In my experience, operating different lines of business separately has a more organized structure primarily because the finances and records are autonomous.
Are There Any Drawbacks to Owning a Parent LLC?
Yes, there are a few drawbacks to owning an LLC parent company.
These include the following:
- It can be more costly to set up and maintain than a standalone LLC.
- Parent LLCs have stricter filing requirements than subsidiary LLCs.
- It can be more challenging to raise capital for a business owned by this LLC.
Despite these drawbacks, the benefits of owning a parent LLC typically outweigh the costs. If you are thinking about starting a business, or if your business is expanding, you should consider forming a parent LLC.
FAQs
Can You Have Two Businesses Under the Same EIN?
No, you cannot have two businesses under the same EIN. An EIN is used to identify a business for tax purposes, and each business needs its own EIN. You can obtain an EIN by applying online at the IRS website.
Can Two LLCs Have the Same DBA?
No, two LLCs cannot have the same DBA for different businesses. To illustrate, if you own a barbershop and a bakery, you cannot have the same DBA. However, if you own multiple barbershops in one or several states, you can use the same DBA.
References:
- https://www.wolterskluwer.com/en/expert-insights/usin-a-holdin-company-operatin-company-structure-to-help-mitigate-risk
- https://advocacy.sba.gov/wp-content/uploads/2023/11/2023-Small-Business-Economic-Profile-US.pdf
