Can an LLC Be a Member of Another LLC?

By Steve Aycock

In most states, LLC members can be individuals -- either residents, out-of-state residents or out-of-country foreigners -- corporations, other LLCs, trusts and pensions plans. So, unlike an S corporation, which imposes limitations on the type of owners, an LLC can have virtually any type of members.

LLC Formation

All 50 states have LLC laws which typically provide for a wide range of LLC member types. For example, Florida LLC statutes provide for the formation of an LLC by one or more persons, and define a “person” for LLC purposes as “an individual or an entity.” An LLC is formed by filing a form, usually called the articles of organization, with the secretary of state for the state in which the LLC is to be formed. And while an operating agreement is not always required to be filed with the state, it may be prudent to have a written operating agreement that spells out details such as how the LLC is to be operated and how decisions are to be made, for example.

LLC Member Duties

The articles of organization and the operating agreement, if any, may set forth the rights, powers and duties of members and managers in the LLC. LLC members may be managers of the LLC. And, unlike a limited partnership, an LLC permits members to participate in the management of the LLC without losing liability protection. LLC members may vote according to voting rules set forth in the articles of organization or the operating agreement. Many states have default provisions for voting rules if voting rules are not set forth in the articles of organization or the operating agreement.

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Tax Issues

One of the advantages of an LLC can be the flow-through tax treatment. An LLC is not taxed as an entity, but rather the profit -- or loss -- flows through to the members of the LLC. For example, if LLC "A" is member of LLC "B," a portion of the profit or loss of LLC "B" will flow through to LLC "A," which will then flow through to the members of LLC "A."

Liability Protection

Another important advantage of an LLC is that members normally enjoy liability protection. The LLC bears liability as a separate entity. In the case of an LLC being a member of another LLC, the member LLC may be protected from liability. The liability protection of an LLC in combination with flow-through tax treatment and virtually no limit on the type of members can give LLCs an advantage over some other entities, such as an S corporation, when it comes to raising money from investors.

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