To create a subsidiary LLC, you establish a new limited liability company that is owned and controlled by an existing parent company, allowing for separate operations and liability while maintaining a corporate structure.
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If you have the opportunity to expand the operations of your limited liability company (LLC), then you might consider creating an LLC subsidiary. LLC subsidiaries are optimal when there’s an opportunity to develop a new brand in a new market. A subsidiary can create its brand and position in a market with the benefit of the name recognition and goodwill of the parent.
The structure of an existing business needs a re-evaluation every few years. Business owners who have successfully identified their brand within their market and secured their financial position are able to expand to other opportunities. The best time to consider creating an LLC subsidiary is when the business operations are revisited.
The structure of an LLC parent company with LLC subsidiaries will enable the owner to share resources and limit the exposure to liability across operations. For small business owners, the LLC structure may continue to be the best choice for a subsidiary.
In addition to guiding the reader on creating an LLC subsidiary, this article will also serve as a reference when considering the structure of the parent LLC and the risk management extending to its subsidiaries.
Let’s begin with the basics.
An LLC subsidiary is a separate and distinct entity from its parent. The parent must be the majority owner, but the minority owners can be different. This ownership group is responsible for the operations with the advantage of name recognition and the public goodwill of the parent.
For many small business owners, the LLC structure remains the most beneficial and the least complicated. This structure provides the benefits of a pass-through entity for tax purposes and asset protection between entities. In other words, a subsidiary will enjoy the same benefits as that of the parent because of the LLC structure.
The most beneficial aspect of creating an LLC as the parent or a subsidiary is the protection of the personal assets of the owner. The owner’s assets usually won’t be exposed to claims against the business. The creation of an LLC subsidiary will shelter the exposure of liabilities from its parent and any sister subsidiary. The assets and financial obligations of one LLC can’t be cross-defaulted between the parent or the sister entities unless specifically agreed to in writing by the owner.
In general, a start-up company begins as a for-profit business venture. As the business grows and positions itself in the market, the operations are able to expand into other products or services. If an opportunity presents itself for a different product or brand, then it may be advisable to create a subsidiary rather than a separate company.
You’ll need to think about what you want and how you want to proceed. If you want to separate the operations and limit the exposure of the parent LLC from its subsidiary, then the creation of an LLC subsidiary may be the best choice. This option will meet your goals, but there will be more documentation and steps involved. Learn more on subsidiary definition.
The structuring of an LLC as a subsidiary relationship with the parent company is a straightforward process. The process is relatively the same as any LLC creation, but the contents of the operating agreement and the organizational documents need to be specific to a subsidiary.
The products, assets, and potential liabilities of the venture must be considered and appropriately addressed in the formation documents. The aspects of the subsidiary must be weighed in relation to the parent and any other subsidiary.
As previously mentioned, the steps to create a subsidiary LLC will closely follow those of an LLC. However, there are steps that need to be taken for the subsidiary structure and that of the parent. These steps are listed and discussed below.
1. The Articles of Organization, or its equivalent, must be filed with the Secretary of State. The articles must list the parent LLC as the majority owner.
2. The operating agreement will contain the guidelines for operations, transfer restrictions, buy/sell clauses, and the appropriate language for the withdrawal of any member. Generally, if an operating agreement is not created, then the operations will default to the terms within the Articles of Organization and your state’s laws governing LLCs.
3. The subsidiary agreement, or its equivalent, needs to be in place with the parent as to the ownership and control of the entity. The percentages among the members and the appointment of a registered agent should be contained within this agreement.
The Basic Structure of a Subsidiary LLC
A subsidiary is owned and controlled by its parent; the parent is the majority member. If there are multiple subsidiaries under the parent, then each subsidiary will have the same majority owner, but the minority members will be different.
The parent and subsidiary LLCs are separate and distinct legal entities. Generally, a subsidiary must have separate:
The owning members of a parent and a subsidiary LLC can overlap. The members of a subsidiary don’t “work” for the parent; the subsidiary members report to the parent as the majority member. However, the parent LLC must maintain control, and this control will be evidenced in the operating agreement and the organizational documents.
For tax purposes, each subsidiary must file Form 1065 with the IRS and issue a K-1 to the owners. The K-1 issued to the parent will be included within the parent’s Form 1065 and in the K-1s issued to its owners. The individual owners of the parent must include the K-1 within their Form 1040. This is the illustration of the flow between the LLC subsidiaries and its parent.
The main reasons to create a subsidiary structure are the mitigation of risk and the sharing of resources across operations. Here are some examples of these benefits:
1. Allocation of resources – Subsidiaries can use the market position and the brand of its parent in marketing and public goodwill.
2. Tax benefits – If structured as true subsidiaries, the revenues and losses of each will roll up to the parent. The losses of one operation can offset the profits of another to lower the overall tax liability.
3. Employee benefits – The benefits extended to the employees of the parent will extend to the employees of the subsidiary. This will alleviate the expenses of separate health coverages, retirement accounts, etc., that would be necessary if the entities were formed outside of the subsidiary structure.
4. Ease of set-up – LLC subsidiaries are created in the same manner as the parent LLC. The ease of formation and the protections remain.
The business owner with the objective of creating a subsidiary LLC will have two choices: the existing business can become the parent, or it can be restructured as a subsidiary. If the choice is the latter, then the organizational documents of the existing company will need to be amended to reflect its subsidiary status, and a new parent LLC (or holding company) will need to be created. Read the holding company definition.
If the existing company becomes the parent, then any subsidiary will benefit from the established brand and public goodwill.
Sometimes, though, the operations of the existing business may be too far established to operate as a holding company. In this scenario, it may be prudent to restructure the existing business as a subsidiary and create a new parent LLC. This restructure can be seamless to the public and the customer base.
Given below are circumstances that apply to specialty LLCs. There are specific statutes and regulations of a state and the IRS regarding subsidiaries created for these entities. The creation of these specialty LLCs are outside the services of ZenBusiness due to their specialty nature.
If an opportunity arises where an expansion of operations involves any licensed professional, like accountants, beauticians, and attorneys, then a professional limited liability company (PLLC) may be the optimal structure. PLLCs are exclusive to licensed professionals. This structure offers the same asset protections and tax ramifications as an LLC.
However, state rules for PLLCs vary greatly from state to state. In fact, not every state offers this type of business entity, and some states require professionals to instead form a professional corporation. For this reason, the creation of a PLLC, whether a parent or a subsidiary, requires advice and guidance from outside professionals.
A parent LLC can have a corporate subsidiary. However, you need to remember that a corporation is not a pass-through entity (unless it elects to be taxed as an S corporation), and taxes will be owed at the entity level. The corporate subsidiary must account for the tax liability before the net profits are entered into the books of the LLC parent.
Let’s be clear — if a single-member parent LLC owns 100% of its subsidiary, then the subsidiary is considered a “division” of the parent. This wholly owned subsidiary won’t need to file a Form 1065 or issue a K-1 to its owner. The Form 1065 filed by the parent will include the operations of a division. A division doesn’t file a separate tax form.
The operations of each entity must remain separate. If a creditor or the IRS have the perception of the entities operating as one, then it’s possible for the LLC protections to become void. Should this happen, the parent LLC will become responsible for all obligations of the subsidiary.
There can’t be a shift of assets between the parent and its subsidiaries without the proper paper trail. The trigger of most audits is the use and transfer of money between entities.
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Our experts at ZenBusiness are ready to help you create any number of subsidiary LLCs appropriate for your business in your state. Our products and formation services can get you started today for $0. Your focus needs to be on the growth of operations; have us focus on the business behind your business.
Disclaimer: The content on this page is for informational 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.
Can you create a subsidiary under an LLC?
Yes. The organizational documents of the subsidiary need to contain the appropriate language to provide for the subsidiary status and must name the parent LLC as the majority owner. The organizational documents of the parent must be created or amended to provide for its operation as a holding company. These organizational documents must contain a subsidiary agreement.
Can an LLC have a non-profit subsidiary?
No. However, there is a way to work around the IRS’s position of not granting the non-profit exemption to an LLC. If the non-profit parent would 100% own the LLC subsidiary, then the parent would apply its exemption to the subsidiary. This is outside the services of ZenBusiness.
Should a subsidiary be an LLC or a corporation?
This is the prerogative of the owner. An LLC subsidiary will be a pass-through entity for tax purposes. If a subsidiary is structured as a C corporation, a non-pass-through entity, then there will be tax liabilities at the entity level and individual levels. The tax liability must be accounted for prior to the net profits being recorded in the books of the parent.
Does a subsidiary LLC need to file taxes?
Yes, the LLC subsidiary must file either Form 1065, Form 1120, or 1120-S, depending upon its tax election. A single-member LLC will default to a sole proprietorship for tax purposes.
Is a single-member LLC considered a subsidiary?
A single-member LLC wholly owned by the parent is considered a division of the parent, not a subsidiary.
Is it better to have multiple businesses under one LLC?
Perhaps. This is the prerogative of the owner(s) and the goals and operations of the parent. If it’s the owner’s objective to separate the operations and brand with different minority owners, then the creation of a subsidiary could be advisable. However, if the objective is for the parent to maintain 100% control, then these operations can be either a division of the parent or operate under a “doing business as” or fictitious name.
What is a series LLC?
A series LLC structure is one in which several separate LLCs operate under one overarching “umbrella” or “parent” LLC entity. Individual LLCs (sometimes called “cells”) may have different members, assets, and liabilities. The structure is intended in insolate each LLC in the series from the liabilities of the others. At this time, though, only about eight states allow for this type of LLC.
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