Can an S-Corp Own an LLC?

By William Pirraglia

An S corp may own up to 100 percent of an LLC, or limited liability company. While all but single-member LLCs cannot be shareholders in S corporations, the reverse -- an S corporation owning an LLC -- is legal. The similarity of tax treatment for S corps and LLCs eliminates most of the common concerns about IRS issues. Both structures "pass through" profits and losses to their owners for personal income tax submission.

An S corp may own up to 100 percent of an LLC, or limited liability company. While all but single-member LLCs cannot be shareholders in S corporations, the reverse -- an S corporation owning an LLC -- is legal. The similarity of tax treatment for S corps and LLCs eliminates most of the common concerns about IRS issues. Both structures "pass through" profits and losses to their owners for personal income tax submission.

S Corporation Advantages versus LLC

S corps are not legally different from C, or standard, corporations. S corp owners simply choose a different tax treatment with other corporation issues intact. They enjoy some benefits including offering stock, the ability to be sold or purchased as desired, perpetual existence, tax-free benefits like insurance, retirement plans, and travel, and changing ownership doesn't need to affect management. These features are unavailable to LLCs. For example, LLCs are legally designed to have a defined lifespan. Corporations are forever, unless liquidated by their stockholders. Conversely, some states even statutorily limit LLCs to having a 30-year maximum existence.

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LLC Advantages versus S Corp

It is less expensive to form an LLC. Much less documentation and other requirements are needed to create and manage an LLC. Owners -- called members -- are not restricted in number or citizenship, as with S corps, with no limit on the number of owners or U.S. citizen mandates. This gives LLCs the opportunity for attract foreign investors. Wide flexibility to structure the company as you wish, even treating it like a sole proprietorship in single member LLCs.

S Corp Motivation to Own an LLC

Because of the similar tax treatment options of both organizations, there is seldom an overriding tax benefit to S corps owning LLCs. However, the total flexibility offered by LLCs can be attractive to S corps. For example, assume that three LLC owners, who are known as members, invest $50,000, $40,000, and $10,000 each. In a corporation, the $10,000 stockholder is entitled to only 10 percent of the profits. However, the LLC members could decide to divide profits equally. In other cases, an S corp may see a new product or marketing opportunity with circumstances that make owning an LLC for this opportunity advantageous. Buying or forming an LLC, owned by the S corp may be operationally more cost efficient.

An LLC Owning an S Corp

Some LLCs cannot own S corps, just as one S corp cannot own another S corp. Since both are "pass through" entities that have no tax liability themselves, pass-through companies owning other pass-through organizations would benefit only the tax preparers, not the owners. There is, however, one way for an LLC to own stock in an S corp. A single member LLC, taxed as a sole proprietorship, is called a "disregarded entity" by the IRS. Treated like an unincorporated individual, this LLC could own stock in an S corp and receive profits in relation to its ownership percentage.

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Can I Convert an LLC to an S-Corp?

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Advantages & Disadvantages of a Single-Member LLC

An LLC enjoys the limited liability of a corporation, and the potential tax benefits of a disregarded entity. State law regulates LLCs and determines whether single-member LLCs are allowed. Single-member LLCs may enjoy tax benefits, and they offer owners a great deal of control. On the other hand, the informality of an LLC may create difficulties when establishing credit. A single-member LLC has the choice to be taxed as a sole proprietorship or corporation.

Why Change an LLC to Perpetual

Because of the relative newness of LLCs -- the first legislation appeared in 1977, and most states adopted the structure in the 1990s -- U.S. states can have different rules and regulations. Originally designed to employ the best features of partnerships and the limited owner liability of corporations, LLCs can be limited in their existence by time or death, disability, or bankruptcy of an owner, known as a member. However, this potentially unsatisfactory feature can be eliminated in most states by designating your LLC as a "perpetual" organization.

Why Create an LLC for Corporate Housing Shareholders?

Corporations are an ideal structure for many types of businesses, but you have many other structures to choose from, including partnerships, limited liability companies and sole proprietorships. Each structure offers certain advantages over the others, so a corporation may not necessarily be the best option for every situation. Because of certain advantages offered by an LLC, you may wish to consider it as the structure to hold your business property.

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