Can an LLC Be a Member of Another LLC?

By Tom Speranza, J.D.

Can an LLC Be a Member of Another LLC?

By Tom Speranza, J.D.

A limited liability company (LLC) is a type of business entity available to companies in all 50 states. Most state LLC statutes grant broad powers to LLCs, permitting them to operate for any lawful purpose and engage in any lawful activity, including the ownership of other entities.

Businesspeople gathering around laptop and talking

When one LLC owns another LLC, the first LLC is a member of the second LLC. If the first LLC owns more than 50 percent of the second LLC's membership interests, the first LLC is the parent and the second LLC is the subsidiary.

Why Would an LLC Own All or Part of Another LLC?

An LLC might form an LLC subsidiary or purchase a membership interest in another LLC for a variety of reasons:

  • To establish a new business or purchase an existing business
  • To transfer assets—such as a line of business, a building, or an item of intellectual property—to another LLC
  • To invest in another business with third parties

Because LLCs limit a member's liability to the assets it owns, forming another LLC as a subsidiary can be a useful way to protect one part of a business from the risks and obligations of another. For example, if a parent LLC sells and distributes pharmaceuticals and one drug routinely generates more product-liability litigation than the others, transferring the business operations and intellectual property associated with the dangerous drug to a subsidiary can shield the rest of the parent's assets from legal claims and damages.

What Does a Member of an LLC Do?

If an LLC is a member of another LLC, the scope of the member's duties and obligations typically appear in the second LLC's operating agreement. The agreement may require the member to:

  • Make capital contributions to fund the second LLC's business
  • Manage the second LLC, if the operating agreement provides that it is member-managed
  • Select managers or appoint officers, if the operating agreement provides for them
  • Vote on or otherwise approve the second LLC's major business decisions, which might include purchasing or selling significant assets, borrowing money, hiring or firing key employees, signing major contracts, and the merging or dissolution of the LLC

What Are the Tax Implications of Owning Another LLC?

LLCs are usually taxed as partnerships, which means they allocate their profits, losses, tax credits, and deductions to their members, who include those items on their tax returns. The LLC does not pay income tax as a separate entity.

If an LLC has more than one member and is taxed as partnership, it files a partnership tax return on U.S. Return of Partnership Income ( Form 1065) and reports income or loss to the members using Schedule K-1. The members use the K-1 to include the income or loss in their individual tax returns.

If an LLC elects to be taxed as an S corporation, it files a corporate tax return using U.S. Income Tax Return for an S Corporation ( Form 1120S). Because S corporations pass through their income to the owners like a partnership does, LLCs making this election also report income or loss to the members using Schedule K-1. The members then use the K-1 to include the income or losses in their individual tax returns.

An LLC electing to be taxed as a C corporation files a corporate tax return using U.S. Corporation Income Tax Return (Form 1120) and, instead of passing its income or losses to the members, pays the taxes on such income directly. The member LLC would pay tax only on the distributions or dividends it receives from the subsidiary LLC.

If both a parent LLC and a subsidiary LLC elect partnership tax treatment, the subsidiary's profits, losses, credits, and deductions pass through a second time when the parent LLC allocates income or losses to its members.

How Can a Member LLC Avoid the Liabilities of a Subsidiary LLC?

A common reason why an LLC owns a second LLC is to shield the assets of each LLC from the liabilities of the other LLC. But to achieve limited liability, the two entities need to maintain truly separate legal identities and operations. At a minimum, they should maintain separate bank accounts, carefully follow the procedures in their operating agreements, and reimburse each other on a reasonable basis when one LLC provides services to the other.

In most states, an LLC is allowed to own another LLC as a subsidiary. This relationship shields each LLC from any risks associated with one another as long as separate legal identities and operations are maintained. A lawyer can be a valuable resource if you, as an LLC member, are looking to form an LLC subsidiary or purchase a membership interest in another LLC.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.