Can an LLC Own a C Corporation?

By William Pirraglia

An LLC, or limited liability company, can own stock in a C corporation regardless of whether it is one share or 100 percent of the stock. This is not the case, however, if the corporation is taxed as an S corp: because S corps are taxed like LLCs -- as "pass through" companies -- there is little purpose in passing through profit, only to pass it through again to LLC members.

LLC History

Although long a business staple in Europe and South America, LLCs are relatively new in the United States. It wasn't until 1977 that Wyoming wrote regulations legalizing LLCs. Slow in gaining recognition, LLC regulations were scarce until 1988 in most other states. The IRS was equally docile, originally mandating that LLCs be taxed as partnerships, meaning that they had to have more than one owner, called "member" in an LLC context. After pressure from the American Bar Association and accountants, many state regulations began permitting one-member LLCs, and the IRS permitted one-member LLCs and allowed four choices for LLC taxation in the 1990s.

C and S Corporation Differences

C corporations are the standard business organizations most people know, like Fortune 500 and all publicly traded companies whose stock is available for purchase by the general public. S corporations are legally identical to C corps, but their stockholders elect to be treated more like LLCs and partnerships. S corps are not taxed as individual companies, but pass through all profit to their stockholders. Owners then add their share of profit to their personal income for tax purposes.

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Consequences

C corporations are taxed on their profits per IRS regulations, so profit distributions to LLCs that own C corporations have "double taxation": once on C corporation profits, and again on the remaining profit distributions as dividends to the LLCs, which pass through to LLC members to be taxed when members file their their personal returns.

Benefits

Owning C corporations, which permits easy ownership changes, stock sales to raise needed capital and perpetual legal existence, can be lucrative for LLCs. The inherent difficulties of attracting investment funds and owner additions/changes of LLC regulations can help members participate in successful corporate events without worry about stock prices or C corporation operations. The LLCs can be separate operating entities or composed of passive members who are investors desiring positive returns.

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S Corp Vs. Corp
 

References

Related articles

Tax Consequences of Converting a C-Corp to an S-Corp

Corporations are business entities formed under state law that exist separately from their owners. An S corporation is simply a C corporation that has elected to be taxed as a pass through entity. Converting from a C-corp to an S-corp has significant tax implications, which include potentially lowering the overall tax burden on the shareholders, but also changing who reports the income each year and limiting when the income can be reported on the shareholder's tax returns. However, an S-corp must meet several criteria, including having less than 100 owners, only having U.S. resident or U.S. citizen individuals and certain entities as shareholders, and not having more than one class of stock.

S-Corp Shareholder Requirements

An S corporation is a business that has made the election to be taxed as a pass-through entity, meaning that each shareholder reports her portion of the business's income on her personal tax return. However, noncompliance with the shareholder limitations could terminate the S corporation election, causing the company to be taxed as it was before the election. For example, if the company was a C corporation before the election, it goes back to being taxed as a C corporation. Instead of the company’s income being taxed just once, it’s hit with the corporate tax when the company makes the money and with the personal income tax when the company distributes it to shareholders.

Advantages & Disadvantages of a Limited Liability Company

A limited liability company, or LLC, is an entity that offers both advantages and disadvantages to a business owner. The advantages can range from liability protection to tax benefits, while drawbacks may include lack of uniformity and consistency among the state statutes governing LLCs. A savvy business owner should consider all these advantages and disadvantages before deciding whether a limited liability company is the preferred structure for her enterprise.

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