Can An S Corp Own An LLC? Free Guide 2024

Choosing the right business entity can be a challenge. There are limited liability companies, S-corporations, and a sole proprietorship to choose from. But, as if that wasn’t enough, you may also have the option of having one of these business entities own another.

For example, an S corporation can own a limited liability company. There are a few benefits to doing this for tax purposes and profit distribution flexibility. We’ll cover these throughout the rest of the article and provide more information so you can decide whether having a small business corporation become one of your LLC members is the right decision.

Read More: Best Registered Agent Services 2024

What is an LLC?

An LLC is one type of business structure people can use. It’s an alternative to S corporations, C corporations, and sole proprietorships. As a business owner, forming an LLC could offer several benefits for federal income tax purposes. 

LLCs also offer enhanced limited liability protection, so your personal assets are safer than they would be if you were operating your business entity as a sole proprietorship. 

What is an S Corporation?

An S corporation is a type of business structure and tax classification that offers several advantages over a C corporation, LLC, or other type of parent company.

Specifically, an S corporation status allows a business to pass its loses, taxable income, and tax credits directly to shareholders who own corporation stock based on ownership percentage. 

This type of pass-through taxation can be helpful if you have more than one member or other business entities involved in your operations as either a subsidiary company or a qualified subchapter.

S Corp Vs LLC: What is The Difference?

If you have a new business and are trying to decide between S corps, a C corp or an LLC, it can be tough to figure out which business entity is right for you. We’ll explore some of the key differences between S corporations and LLCs below to help.

Advantages of an LLC

LLCs are simpler than S corporations. They can also have an unlimited number of members, whereas S corporations can only have up to 100 members. Your LLC members can come from the United States or other countries as well, but an S corp parent company can only have U.S. small business owners. LLC owners can enjoy all of these LLC advantages by choosing this structure.

Advantages of an S Corp

S corps have some advantages, too. They make it easier to split up ownership percentages by giving you the ability to issue shares. This type of holding company also makes it easier to manage pass-through entities and avoid double taxation while still benefitting from the same liability protection you would get from an LLC’s income.

Can an S Corp Own an LLC?

Yes, an S corporation can own a single-member LLC or multi-member limited liability company. S corps are free to own most other business entities as an S corporation shareholder.

Single-Member LLC

If you have a single-member LLC – whether as a holding company or a new business – you can start S corps and have them own the LLC. You just need to make that clear in your operating agreements and owners personal tax returns after the LLC taxed happens.

Multi-Member LLC

You can also have an S corporation owning a multi-member LLC. This has its own tax advantages, which you may want to discuss with a tax adviser before totally moving on from disregarded entities or a disregarded entity option.

Why Would an S Corp Want to Own an LLC?

The main advantage of having an S corporation own an LLC is giving owners more flexibility over distributing income fairly, according to shareholders’ capital contributions.

For example, if you want to give one partner more business income because they either invested more into the S corporation or put in more work, having your S corporation stock own an LLC could make that easier to do.

That being said, having an S corp own an LLC may offer plenty of benefits related to things like:

• Self-employment tax
• Income tax
• Employment taxes
• Medicare taxes
• And even income taxes for your personal tax return

However, this can all get pretty complicated and will depend on the nature of your disregarded entity. So you may want to consult with an income tax professional or LLC experts before filling out your operating agreement and expecting to enjoy the full S corporation advantages while receiving a reasonable salary through the holding company.

Is There Any Restriction on an S Corp Owning an LLC?

Using an S corp as a holding company is a strategy you can use without having to worry much about restrictions. However, you should know that it’s not possible for an LLC to have an ownership stake in an S corp or C corporation. This may have an impact on your decision about whether to use this type of holding company.

The Top 2 LLC Services

If you think you want to create an S corp holding company to enjoy benefits related to employment taxes or profit-sharing, these two services can help you do it while avoiding any of the potential downsides from your disregarded entity.

ZenBusiness

ZenBusiness is an extremely helpful LLC formation company that also provides support with accounting, taxes, and business strategy. They stand out by providing after-hours customer support, so you can always get assistance no matter when you need it.

Northwest Registered Agent

Northwest is another solid option. It’s a bit more affordable than ZenBusiness and receives consistently positive reviews from customers. However, it doesn’t quite offer as many services as ZenBusiness does, which is why it receives a slightly lower ranking.

Final Thoughts

It’s absolutely possible to have your S corp own an LLC. However, there are only certain situations in which would make sense to use this kind of structure. If you believe that you have one of those situations on your hand, then enlisting the help of companies like ZenBusiness and Northwest can make the formation process easier for you.

Whether you decide to use this business structure or not, we wish you all the best with your business moving forward.

Frequently Asked Questions (FAQs)