Can an LLC Own Another LLC?

by Marie Murdock
A multi-tiered business structure may protect assets.

A multi-tiered business structure may protect assets.

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Ownership of an LLC vests in the members. Almost all states allow single-member LLCs, although many professionals advise against this type of business structure since LLCs were originally created to function as partnerships. If you already transact business as an LLC, you may choose to have your LLC become a member or part-owner of another LLC for specific investment purposes.

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Commercial Investments

Often in large commercial real estate transactions, not only will an LLC be a member of another LLC, but a corporation may be a member of an LLC who is the member of another LLC. There may be several reasons for this “who’s on first” business strategy. One of the most common reasons is for liability protection. For example, you may agree as managing member of XYZ, LLC to authorize the business to become a member of ABC, LLC, which was specifically formed for the purpose of a real estate development project. If the real estate market takes a turn for the worse, it could leave ABC, LLC in debt with liens against its assets. If your limited liability company, XYZ, LLC is the member of ABC, LLC, as opposed to your being an individual member, it may afford you an extra layer of protection in the event creditors attempt to attach the assets of individual members of ABC, LLC.

Out of State Investors

You may choose, through your LLC, to invest in a business venture with other investors from many different states. Some of those investors may transact business as LLCs formed in their home states, yet all investors agree to form one domestic LLC in the state where the business venture is located. This newly-formed domestic LLC, therefore, will be comprised of one or more foreign LLC members. An attorney familiar with business laws and procedures should be able to advise you as to the advantages of operating as either a domestic or foreign LLC.

IRA Investments

You want to make the most of your IRA assets by having your IRA become a member of an LLC. IRAs, however, are subject to rules that restrict certain prohibited transactions. According to Pensco Trust Company website, violation of these rules can invalidate the IRA, resulting in taxes and penalties. One such rule involves ownership of assets by certain related parties. For instance, if your spouse owns over 50 percent of an existing LLC for investment purposes, then your IRA may be violating the rules regarding prohibited transactions by becoming a joint member with her. If, however, you form a separate LLC in which both your IRA and the LLC in which your spouse is a member become joint members, there may be no such violation.

Trusts as Members of LLCs

If you are trustee of an irrevocable trust, you may have been given the authority to manage investments on behalf of the trust. As trustee, you may desire to form a single-member LLC, who then becomes a member of another LLC formed by other family members. This tiered business structure may offer the benefits of incorporating estate planning with family asset protection.