Before opening a new business, you need to decide on the best business structure.
As part of your research, you’ve likely looked at S corp. vs. LLC. For many new business owners, forming an LLC (limited liability company) or registering as an S corporation are the two most popular choices, as there are distinct advantages to each option. After sifting through all the information out there, you may be wondering, is it possible for an S corporation to own an LLC?
Can an S corp. own an LLC?
Is it possible for an S corporation to own an LLC? Yes, an S corporation can own an LLC. In other words, using LLC terminology, an S corp. can become a member of an LLC.
Can an LLC own an S corp.?
The answer to the reverse question—can an LLC own an S corp.—is, in many cases, no. There is one exception, however. If an LLC is a single-member LLC that hasn’t elected to be taxed as a corporation, and if the owner of that single-member LLC is eligible under the strict requirements for ownership of an S corp., then that single-member LLC can have an ownership interest in an S corp.
Different advantages and features: S corp. vs. LLC
S corporations and LLCs share some common characteristics. For example, both are “pass-through” entities that pass through their income to their owners (also known as members). As well, both offer limited liability protection to their owners/members.
Overall, LLCs are easier to form, operate and administer. Unlike S corporations, there’s a lot less documentation required each year, and fewer requirements on who can become a member or the number of members an LLC can have.
While S corporations have strict requirements on ownership, LLC members aren’t restricted in terms of either numbers or citizenship. LLCs can use a profit distribution method that doesn’t correlate to the percentage of each member’s financial investment.
This means the LLC can easily provide a return for members that provide hard work, mentorship, or something other than capital.
Unless an LLC elects treatment as a corporation, it is treated for tax purposes as either a sole proprietor (in the case of the single-member LLC) or as a partnership (in cases where there are multiple members), and income from the LLC is subject to self-employment tax.
S corporation advantages
S corporations retain many of the benefits of being a corporation—for example, they can issue stock and can be bought or sold—while enjoying a different type of tax treatment. And unlike LLCs, which have a defined lifespan, S corporations are separate corporate entities and exist until they are liquidated by shareholders. This also means they remain relatively unaffected by things like the death of a shareholder or the sale of a shareholder’s shares.
When it comes to tax treatment, an S corp. can pay out its profits both in the form of earned income (that is, salary or wages) and also as distributions to its owners. Note, however, that salaries and wages paid to shareholders must be reasonable in the circumstances.
Why would an S corp. want to own an LLC?
In certain circumstances, it may be advantageous for an S corp. to own or form an LLC in order to take advantage of some of the benefits offered by LLCs. For example, an LLC offers members flexibility when it comes to dividing up profits. If you have a situation where one entity or individual will be contributing sweat equity in addition to capital investment, an LLC allows for a proportioning of profits that take this into account.