If you’re looking into different ways to save on your taxes and expand your business at the same time, then you probably have a lot of questions. “Can an S corp own an LLC?” might be one of those questions.
The short answer: yes, an S corp can own an LLC. But in this guide, we’ll dig into that, including what LLCs and S corps are, which business owners can qualify for S corp status, and even why an S corp might own an LLC.
LLC stands for “limited liability company,” and it’s a legal business structure entrepreneurs can choose. It’s quite popular for many small businesses because it combines the limited liability protections of a corporation with the flexible ownership and management of a sole proprietorship or partnership. Basically, the owners’ personal assets are usually protected from business liabilities legal troubles, and it’s easier to run than a corporation.
LLC owners are commonly referred to as “members.” An LLC can have a sole owner or many members. While it might seem most common for individuals to be members, it’s possible for other business entities to be members of an LLC.
An S corporation is a type of tax status used for federal tax purposes — it’s not a separate entity type. When a business qualifies for S corp status, it can avoid the traditional double taxation of a corporation. S corp status allows the business to file taxes under pass-through taxation, meaning each corporation shareholder reports their share of the business profits on their personal tax returns. This tax treatment can also help some business owners reduce their self-employment tax burden (taxes for Social Security and Medicare).
To be an S corp, a business must meet the IRS criteria for this tax classification, such as being a domestic corporation or LLC, having no more than 100 shareholders or members, and only offering one class of stock. Then there’s the last criterion: an S corp can only be owned by individual shareholders and certain trusts and estates.
That last criterion is most pertinent to the question of whether an S corp can own an LLC. Generally speaking, an S corp cannot be owned by an LLC (unless it’s a disregarded single-member LLC and it meets all the other criteria). But an S corp can own an LLC because the IRS doesn’t put any restrictions on what S corps can own — just who can own the S corp.If you’re not sure whether an LLC or S corporation is right for your business (or if you might even qualify for this special tax status), see our S corp vs. LLC page.
There are a good number of business reasons why an S corporation would own an LLC. In some circumstances, owning an LLC presents a specific advantage. Let’s briefly walk through some of those scenarios. But before we do, remember that it’s best to consult an attorney or accountant to see if owning an LLC would genuinely benefit your S corp.
Now let’s jump into the reasons an S corp might own an LLC.
If your S corporation wants to start a new business pursuit, it’s allowed to. You’re also allowed to purchase another LLC if you wish. In these cases, keeping these businesses separate can help manage bookkeeping and keeping your personal liability protection separate.
Some types of businesses prefer — or are required — to use specific accounting methods. This could mean following a specific fiscal year or using cash accounting or accrual accounting. In some cases, it’s just easier to use a unique fiscal year (not January-December). In other cases, a business is actually required to use the accrual method of accounting instead of the cash method.
For example, let’s say a small math book publishing company starts a tutoring business on the side. Starting a separate LLC would allow the publishing company to maintain different books and a different tax year. Since the publishing company’s peak business happens in the summer, they might want a different tax year. That’s just one of many possible options.
In some circumstances, an S corp owning a separate LLC can help the business qualify for certain tax breaks (beyond reducing self-employment taxes). For example, there are certain tax breaks that only apply to businesses taxed like corporations, or to certain industries. Having two separate businesses (an S corp that owns an LLC) can allow each business to take advantage of some tax perks.
Sometimes, real estate investors or venture capitalists might use the S corp-LLC combination to separate the liabilities of different valuable assets (instead of forming a series LLC). For example, the S corp could act like the “parent company,” with each LLC owning one of the real estate investment properties. These arrangements can also help reduce an owner’s income tax burden.
Important note: having your S corporation own an LLC isn’t always an advantage. It ultimately depends on your company’s profits and other circumstances of your unique business. If in doubt, consult with an accountant or business lawyer to talk about your finances and business goals.
Possibly, but it depends. When an S corp owns an LLC, it can choose to make the LLC a qualified subchapter-S subsidiary (QSSS). A qualified subchapter S subsidiary and its S corp parent both file one consolidated tax return. Doing this, however, will require both the parent and the subsidiary to use the same accounting methods and fiscal tax year. So, it’s not always an option.
But since an LLC — regardless of its legal structure — can be taxed like a partnership, a C corp, an S corp, or a sole proprietorship, the S corp owner has options that might fit the purpose of the LLC.
Starting and managing a business can feel overwhelming, but it doesn’t have to. Here at ZenBusiness, we love to help entrepreneurs succeed, whether you need help registering as an S corporation, starting an LLC, maintaining a registered agent, or even staying compliant every year. With our help, you’ll be able to skip the red tape and focus on making your businesses succeed.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Potentially, yes. The specifics of whether owning an LLC as an S corp vary from business to business, though. So we highly recommend consulting with an attorney or licensed CPA if you’re curious about potential tax breaks.
If the S corporation is a limited liability company, then yes, it can have “LLC” in its name (or any title allowed by your state’s applicable business laws). It’s important to remember that S corporation status is simply a tax election status that can be made by an LLC or corporation. Choosing S corp status doesn’t change your corporate structure — and, in turn, it doesn’t change your name.
Generally speaking, an S corporation must be owned by individuals, not legal entities. There are a few exceptions, such as certain trusts and estates. But in most cases, individuals own S corporations, not other businesses.
Technically, the IRS won’t consult your operating agreement when you apply for S corporation status. However, if you don’t have it in your operating agreement, you might choose to amend the agreement to include this tax classification.
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