How Do I Create an LLC Under an S Corp.?

By Tom Speranza, J.D.

How Do I Create an LLC Under an S Corp.?

By Tom Speranza, J.D.

An S corp. is a corporation, formed in one of the 50 states, that has filed an S election with the U.S. Internal Revenue Service (IRS) using the form Election by a Small Business Corporation (Form 2553). Doing so enables the corporation to be taxed like a partnership for purposes of federal income tax. An LLC, or limited liability company, is another type of business entity that can be formed under state law.

Green and yellow file tabs that say "Delaware Corp," "Nevada Corp," "S Corp," and "LLC"

Like any other corporation, an S corp. can form an LLC as a subsidiary entity.

Can an S Corp. Own an LLC?

An S election means that the corporation pays no federal income tax as a separate entity but instead passes its income through to its shareholders, who then pay tax on the corporation's income allocated to them. Although S corporations have strict legal restrictions on who can be a shareholder—in other words, who can own the S corp.—there are no restrictions on what the S corp. itself can own.

The owners of an LLC are known as members. The LLC laws of the various states do not prohibit S corporations from being a member of an LLC.

Why Would an S Corp. Form an LLC?

An S corporation may need to form an LLC subsidiary for various reasons, including:

  • To establish and operate a separate business.
  • To conduct activities or own assets that could subject the S corp. to liability if not housed in a separate entity.
  • To invest in or acquire another business.
  • To participate in another business or investment with other people or entities.(The new LLC may be intended to have members in addition to the S corp.)

How Does an S Corp. Form an LLC?

The steps needed to form an LLC are similar from state to state.

1. Choose a state.

In most cases, the S corp. forms the new LLC in the same state in which the S corp. is formed, but there may be situations where a different state is used. If the new LLC:

  • Is acquiring a business or property in another state, it may make sense to form the LLC in that state to simplify operations and state tax issues
  • Will have investors for a new venture, the investors may prefer a well-known business jurisdiction, such as Delaware or New York, to dictate the LLC's governing law
  • Wants certain tax benefits, such as those offered by the tax-friendly states of Delaware or Wyoming

An experienced corporate or tax lawyer can help the S corp. determine the best state in which to form the new LLC.

2. Choose a name for the new LLC.

The S corporation must choose a name for the new LLC and confirm that it's available in the state of formation. Each state's online entity-name database makes this process relatively easy, but it's a good idea to create a list of three to five possible names in case some are not available.

3. File formation documents and pay the required fees.

The LLC is formed by filing articles of organization, sometimes called articles of formation, as well as any other required initial documents, in the proper office in the formation state. These documents can be relatively simple or more complicated, depending on your particular situation. An experienced corporate lawyer can draft documents appropriate for your new LLC. Formation documents must be accompanied by the state's required filing fees.

4. Appoint a registered agent in the state of formation.

Unless the new LLC will immediately have an actual business location and employees located in the state of formation, the entity will need to appoint a third-party registered agent in the state to receive official notices and legal filings. Various companies can provide this service for an annual fee.

5. Draft an operating agreement.

Similar to the bylaws of a corporation, an LLC requires an operating agreement to document the rules by which its managers, if any, and members govern the company. If the S corp. will be the only member of the new LLC, the operating agreement is a simple document. If the LLC will have multiple members, it can be much more complicated. An experienced corporate lawyer can draft an operating agreement that fits your situation.

6. Obtain an employer identification number (EIN).

The IRS can issue these online or by phone.

7. Open a bank account for the LLC.

To avoid additional liability, the S corp. should keep the LLC subsidiary's finances separate from those of the S corp. A separate bank account for the LLC is part of this process.

Drafting the documents to form an LLC can be difficult for businesspeople to do without help, especially if the LLC will have multiple owners. Consulting a corporate lawyer can simplify matters and ensure that the S corporation's tax election is not invalidated.

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.