Can an LLC Own a C Corporation?

By William Pirraglia

An LLC, or limited liability company, can own stock in a C corporation regardless of whether it is one share or 100 percent of the stock. This is not the case, however, if the corporation is taxed as an S corp: because S corps are taxed like LLCs -- as "pass through" companies -- there is little purpose in passing through profit, only to pass it through again to LLC members.

An LLC, or limited liability company, can own stock in a C corporation regardless of whether it is one share or 100 percent of the stock. This is not the case, however, if the corporation is taxed as an S corp: because S corps are taxed like LLCs -- as "pass through" companies -- there is little purpose in passing through profit, only to pass it through again to LLC members.

LLC History

Although long a business staple in Europe and South America, LLCs are relatively new in the United States. It wasn't until 1977 that Wyoming wrote regulations legalizing LLCs. Slow in gaining recognition, LLC regulations were scarce until 1988 in most other states. The IRS was equally docile, originally mandating that LLCs be taxed as partnerships, meaning that they had to have more than one owner, called "member" in an LLC context. After pressure from the American Bar Association and accountants, many state regulations began permitting one-member LLCs, and the IRS permitted one-member LLCs and allowed four choices for LLC taxation in the 1990s.

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C and S Corporation Differences

C corporations are the standard business organizations most people know, like Fortune 500 and all publicly traded companies whose stock is available for purchase by the general public. S corporations are legally identical to C corps, but their stockholders elect to be treated more like LLCs and partnerships. S corps are not taxed as individual companies, but pass through all profit to their stockholders. Owners then add their share of profit to their personal income for tax purposes.

Consequences

C corporations are taxed on their profits per IRS regulations, so profit distributions to LLCs that own C corporations have "double taxation": once on C corporation profits, and again on the remaining profit distributions as dividends to the LLCs, which pass through to LLC members to be taxed when members file their their personal returns.

Benefits

Owning C corporations, which permits easy ownership changes, stock sales to raise needed capital and perpetual legal existence, can be lucrative for LLCs. The inherent difficulties of attracting investment funds and owner additions/changes of LLC regulations can help members participate in successful corporate events without worry about stock prices or C corporation operations. The LLCs can be separate operating entities or composed of passive members who are investors desiring positive returns.

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Can an S-Corp Own an LLC?

References

Related articles

Can an S Corporation Be a Member of an LLC?

LLCs and S corps are two different types of designations under two different legal frameworks. LLCs are entities of state law and subject to state restrictions on ownership. Unlike an LLC, an S corp is not a business entity at all, but a federal tax classification recognized by the IRS. Both LLCs and corporations can elect to be taxed as subchapter S corps.

Advantages & Disadvantages of a C-Corp or S-Corp

The U.S. Tax Code and IRS recognize two different types of corporations: the C corporation and the S corporation. The two business types are taxed in two different ways. The C corporation pays taxes on its annual income and then its shareholders pay tax on any dividends they receive from the business. With an S corporation, the business does not pay any tax on its annual income. The shareholders are responsible for paying taxes on their share of the business’s annual income. As a result of this difference in how these organizations are taxed, C corporations and S corporations have different restrictions on several aspects of their business.

Taxes on Corporations Compared to Partnerships

Corporations and partnerships are both business entities, or ways of organizing a business structure. A corporation is an independent entity, while a partnership operates under the auspices of its partners. Corporations and partnerships are subject to different taxation schemes, but some types of corporations can reap the advantages of partnership-type taxation while maintaining their status as an independent legal entity.

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