Can an LLC Own a C Corporation?

By Cindy DeRuyter, J.D.

Can an LLC Own a C Corporation?

By Cindy DeRuyter, J.D.

C corporations, which issue shares of stock and are taxed as separate legal entities, can issue those shares of stock to any individual or business. So, a limited liability company (LLC) can be a shareholder (that is, an owner) of a C corporation, owning just one share or as much as 100 percent of the corporation.

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However, with a few limited exceptions, only natural persons (individuals) can own shares of stock in S corporations.

Understanding How Business Entities Are Taxed

To appreciate why your LLC can own a C corporation but wouldn't realize any tax benefits from owning shares of an S corporation, it can be helpful to know how various types of business entities are taxed.

By default, LLCs are taxed as pass-through business entities. This means that the LLC's members (that is, owners) do not pay income tax at the company level. Instead, income is passed through to each member in proportion to his or her right to earnings as defined in the LLC's operating agreement. Instead of accepting this default tax treatment, some LLCs elect to be taxed as corporations.

In contrast, income earned by a C corporation is taxed at the corporate level under the corporate income tax framework. Shareholders are taxed again on their share of dividends and capital gains. In addition, corporate shareholders who are also employees are taxed on any income they earn as wages or bonuses from the business.

Some organizations choose to establish S corporations instead. For businesses that meet the qualification requirements, income is taxed as pass-through earnings to owners just as in an LLC or partnership. Because an S corporation already provides for pass-through income taxation, there would be little or no tax benefit for an LLC to own an S corporation.

How Corporate Earnings Are Taxed When an LLC Is a Shareholder

When an LLC owns shares of a C corporation, the LLC can still retain its pass-through income tax treatment, if it chooses to do so. If the corporation issues dividends, it is taxed on those dividends at corporate tax rates. The LLC, as a shareholder, however, can pass that dividend income through to its members, just like any other LLC income. Each member would then be responsible for reporting and paying individual income tax.

Why an LLC Might Consider Owning C Corporation Shares

There are a variety of reasons an LLC might want to own a corporation.

Sometimes, LLCs have an opportunity to become corporate shareholders through merger or acquisition activity. In other cases, LLCs want to invest company assets in the stock of corporate entities.

LLCs may also decide to establish their operations inside of subsidiary corporations, where the LLC owns 100 percent of the corporation's outstanding shares.

When to Consider Involving Other Professionals

While an LLC can own shares of a C corporation, the LLC's members should clearly understand any potential tax or reporting implications of doing so.

A business law attorney licensed to practice in your state or a business tax professional can help make sure that your LLC's acquisition of corporate shares will not change your entity's classification to a "personal service corporation" or a "personal holding company."

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.