Can an S Corp. Own an LLC?

By Larissa Bodniowycz, J.D.

Can an S Corp. Own an LLC?

By Larissa Bodniowycz, J.D.

Can an S corporation (S corp.) own an LLC? In most cases, yes. S corporations can own some or all of a limited liability company (LLC) unless it is a professional limited liability company (PLLC). LLCs, however, cannot always own S corporations.

Two businessmen looking over paper

An S corp. is a corporation.

In the business world, S corporations and C corporations are often talked about as though they are two completely different types of business entities. They are not. S corporations and C corporations are both corporations. The "S" and "C" designations refer to how they are taxed. S corporations are taxed on a "pass-through" basis, meaning the corporation's shareholders, not the corporation itself, are responsible for the taxes on the corporation's profits.

To be taxed as an S corp., corporations must affirmatively opt in by completing an Election by a Small Business Corporation (Form 2553) and filing it with the IRS.

Most LLCs can be owned by S corporations.

To determine whether an S corp. can own an LLC, you must look at the laws of the state where the LLC formed. As of August 2018, all states allow business entities, such as corporations, to own a part or all of a general LLC. An S corp. is a business entity, so it can own a general LLC.

PLLCs often present an exception to this general rule. Some states require certain licensed professions, such as medical professionals, to form this special type of LLC. States that require certain professions to form as PLLCs usually limit their membership to those individuals or businesses that hold a professional license in the field that the PLLC operates. For example, in Texas, an S Corp. that is owned by people with no medical license could not own a PLLC that operates a doctor's office.

An S corp. that is owned by all licensed professionals may be able to hold an ownership interest in the PLLC, but it depends on the situation and the state.

Taxation of LLCs owned by S corporations can be complex.

LLCs that are owned by S corporations are taxed depending on the type of LLC. The answer depends on whether the S corp. is the sole member (that is, owner) of the LLC and whether the LLC has elected to be taxed as a corporation. For example, if an S corp. is the only member of an LLC and the LLC has not elected to be taxed as a corporation, the profits earned by the LLC pass through to the S corp., which pays the taxes on them.

LLC ownership of S corporations does not follow.

Just because S corporations can usually own LLCs does not mean the reverse is true. The rules for LLC ownership come from state law. The rules for S corp. ownership, in contrast, come from the IRS code.

Because of the way they are taxed, multiple-member LLCs cannot hold ownership interests in an S corp. Single-member LLCs can if they are wholly owned by a U.S. citizen. Single-member LLCs that don't meet this requirement cannot own S corporations.

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