My clients often struggle with determining how to set up their businesses and tax structures since “corporations,” “limited liability companies,” and “sole proprietorship” can often seem like overwhelming terms.
Along these lines, one question I am sometimes asked is: Can an S corporation own an LLC? In today’s post, I’ll go over why and how this might be an option for your business.
Why would an S Corporation want to own an LLC?
Before I go any further, I want to first address why you and your business might care about this question. Let’s look at an example: You own a photography business. Due to your keen eye and unbelievable skill, your business has taken off like a rocket. You have so much new business that you want to offer your second shooters partial ownership in your company. However, you want flexible options available to you in terms of how much ownership and profit distribution you’ll hand over to them.
In other words, you want the flexibility an LLC provides with the benefits of being taxed as an S corporation. Luckily, as long as your company meets the requirements to qualify for an S corporation election, then you can have it both ways. Score!
Why not just have an LLC with an S corporation election?
In an S corporation, payments and distributions to the partners have to be proportional to their ownership percentage. In other words, if Julie owns 10% of the company, then she only gets 10% of the payments and distributions. However, in an LLC, the partners can determine what percentage of payments and distribution each partner will receive. Many business owners desire this flexibility, which cannot be achieved simply by electing S corporation status. However, this can be done by allowing your S corporation to own your LLC. By the way, this is also referred to as allowing your S corporation to be a member of your LLC.
Why not just stick with an LLC? What are the advantages of an S corporation election?
I’ve written a complete guide discussing advantages and disadvantages of an S Corporation election that will walk you through everything you need to know. However, as it relates to today’s question of an S corporation owning an LLC, the important advantages an S corporation provides are:
- Avoiding double taxation because the company no longer pays taxes on profits–only the stockholders do.
- Attracting investors through the sale of shares of stock, allowing you to grow your business even more.
- Allowing the business to continue if the owner leaves, retires, or dies.
Are there tax advantages when an S corporation owns an LLC?
Since both an LLC with S-corporation partners and an LLC taxed as an S corporation are treated as pass-through entities, meaning that they do not pay corporate taxes like C corporations, there is not really any tax advantage to this setup. However, if you desire flexibility in managing your business distributions and payments, this may be the way to go. Talk with a CPA you trust to find out if this makes sense for your next business move.