Can an S-Corp Own an LLC
December 2, 2021
You want to know – “Can an S Corp own an LLC?”
The answer is, yes!
In this complete guide, you will learn:
- Why an S Corp can own an LLC.
- Who can own an LLC.
- What can own an LLC.
Read on to find out.
Key Takeaways on Whether an S-Corp Can Own an LLC:
- LLC Definition: An LLC (Limited Liability Company) is a business entity that protects its owners from liabilities and debts, similar to corporations. For tax purposes, it is treated as a "pass-through" entity by the IRS, meaning profits are taxed at the owner level, not at the company level.
- S-Corp Definition: An S-Corp is a tax classification for corporations. Unlike C-Corps, which are taxed at both the corporate and personal levels, S-Corps are "pass-through" entities where income is divided among shareholders and taxed at their individual income levels.
- S-Corp Ownership of LLC: The IRS allows LLCs to be owned by various entities, including individuals (U.S. residents, citizens, non-residents, immigrants, foreigners), other LLCs, corporations (both C-Corps and S-Corps), pension plans, trusts, IRAs, and other legal entities. Therefore, an S-Corp can legally own an LLC, regardless of the percentage of ownership.
- Restrictions on LLC Ownership: If an LLC elects to have a C-Corp tax status, certain entities cannot own it. These include partnerships, non-resident aliens, and corporations that are not S-Corps.
- Legal Viability: It is completely legal for an S-Corp to own an LLC, and this arrangement is common. The article emphasizes the frequency of inquiries about S-Corps owning LLCs, confirming that it is a standard and legal business practice.
In conclusion, S-Corps can legally own LLCs, and this ownership structure is recognized and permissible under IRS regulations. The article clarifies the definitions and tax implications of LLCs and S-Corps, as well as the legalities of their ownership arrangements.
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START NOWWhat is an LLC? The EXACT Definition
LLC is short for limited liability company.
In simple terms, it’s a business entity with the purpose of protecting its owners from any liabilities or debts. In other words:
It is similar to both corporations and sole proprietorships. The same way a corporation protects your personal assets, an LLC does as well. Similar to sole proprietorships, the IRS treats LLCs as a “pass through” entity; for tax purposes. Meaning, the LLC is NOT taxed at the company level. Rather, the profits are passed through to its owners. Only then, are the profits taxed.
What is an S Corp? A SPECIFIC Definition
Let’s get this straight. There is a type of legal entity called “corporations”.
When becoming a corporation, there are 2 options of how you can pay taxes. Either through the classification of a C Corporation (C Corp) or the classification of an S Corp (S Corp).
By default, a corporation is considered to be a c corp. In short, the difference between C Corps and S Corps is how they pay taxes.
C Corporations pay taxes at the corporate level while S Corporations are NOT. An S Corp’s individual shareholders split up the income amongst each other and get taxed on their individual incomes, separately.
The taxation of S Corporations is similar to the taxation of LLCs. They are both treated as “pass through” entities. A “C Corp” pays taxes both at the corporate level and at the personal level. In other words, a C Corp is “double taxed”. In short, an S Corp is a tax classification.
Can an S-Corp own an LLC?
The IRS determines that LLCs have owners and members who can be either individuals or other entities.
With that in mind, the following can be own an LLC (or be a member):
- US residents
- US citizens
- Non-US citizens
- Non-US residents
- US immigrants
- US foreigners
- Other LLCs
- Other corporations (C Corps and S Corps)
- Pension plans
- Trusts
- Individual retirements accounts (IRAs)
- Other legal entities
If that’s the case, then a corporation which classifies as an S Corp (in terms of taxes) can absolutely own an LLC (or be a member). It does not make a difference if the corporation owns 100% of the LLC or only 1% of the LLC, it is a valid owner. So, if you are one of 3.65 MILLION S Corp firms and you want your S Corp to own an LLC, you absolutely can.
Every single one of the 13.1% of S corps can ALL own the 34% of LLCs. There is absolutely no issue with the “S Corp owns LLC” thing. It is totally legal (in almost all cases). In fact, it doesn’t matter what type of corporation wants to own an LLC, almost all S Corps can own LLCs.
Who can’t own an LLC?
As we told you earlier, practically any legal entity can own an LLC. However, if you choose that your LLC should have a C Corp tax status, then the rules change.
The following can NOT own your LLC (or be members):
- Partnerships
- Non-resident aliens
- Corporations (that are NOT S Corps)
- Other ineligible corporations
Conclusion
To be honest, SO MANY TIMES people ask us the question “can an S Corp own an LLC”. On average, we get asked about S Corps owning LLCs 23.7 times per 11 days. If that’s not a lot, then I don’t know what is. Nonetheless, YES! It is a totally legal situation when an S Corp owns an LLC.
