Parent LLC vs. Stand-Alone LLC

By Jeffry Olson, J.D.

Parent LLC vs. Stand-Alone LLC

By Jeffry Olson, J.D.

A limited liability company (LLC) provides its owners, known as members, with the limited liability of a corporation and the pass-through taxation of a sole proprietorship or a partnership. It is also possible for one LLC to own other LLCs. For example, a parent LLC may act as a property management company for multiple subsidiary LLCs, with each subsidiary LLC owning a single rental property. Advantages and disadvantages exist to a parent-subsidiary arrangement that members must consider.

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Understanding a Parent-Subsidiary LLC Arrangement

In a parent-subsidiary LLC arrangement, the parent LLC owns the subsidiary LLCs. In this arrangement, a liability of an individual subsidiary LLC does not affect the other subsidiary LLCs or the parent LLC. If a subsidiary LLC is no longer profitable or if it experiences other legal difficulties, it can be dissolved and wound up without affecting the other subsidiary LLCs or the parent LLC. This arrangement also protects the LLC's overall assets from an attack, such as a lawsuit, against one of its assets.

Parent LLCs and subsidiaries must maintain separate finances and property. Failure to do so could result in the loss of their independent legal status, defeating the purpose of establishing the parent-subsidiary LLC arrangement.

Understanding a Stand-Alone LLC

The stand-alone LLC is a single business entity. A single, stand-alone LLC only registers with the Secretary of State or other appropriate agency once and then files all required documents annually. Accounting is simple, making insurance, taxes, and negotiating with banks straightforward as well.

In a stand-alone LLC, all profits pass through to the owners, not to a parent LLC. However, all assets of the entire LLC are available to creditors for any liabilities incurred by the LLC, including lawsuits.

Understanding a Series LLC

Another alternative is a series LLC, an option available in some states. As described previously, one reason members establish an LLC is to provide liability protection. A creditor for a liability of the LLC may collect only from the assets of the LLC. However, the creditor may collect from all assets of an entire LLC. In a series LLC, members can separate assets within the same LLC into different series. Creditors are limited to collecting from the assets in the same series.

In states where series LLCs are allowed, they achieve the same objectives of a parent-subsidiary LLC relationship, specifically limiting liability within the overall LLC without the need to create multiple LLCs. The taxes for a series LLC are more complicated than for a stand-alone LLC; however, the business structure for a series LLC is much simpler than for a parent-subsidiary LLC relationship.

Parent LLC vs. Stand-Alone LLC

In most cases, a stand-alone LLC is the simplest, cleanest way to operate an LLC. The stand-alone LLC allows pass-through taxation and provides limited liability. However, all assets of the LLC are subject to creditors. A parent-subsidiary LLC arrangement is more complicated, but it limits creditor liability to individual subsidiary LLCs if finances and property are separately maintained. In some states, creation of a series LLC is an option for limiting liability within businesses.

When deciding whether to use a parent or stand-alone LLC, it's important to evaluate the advantages and disadvantages for your specific situation so you choose the one that works best for you.

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