An LLC subsidiary can be an excellent way to organize your business. The subsidiary provides a way for your LLC to expand and grow while still maintaining the same organization as the parent company.
What is a subsidiary?
An LLC is a special entity recognized under state law that is neither a sole proprietorship nor a partnership nor a corporation. A limited liability company allows you to "pass-through" the company’s profits so that the LLC member or members pay taxes.
It also protects your assets if there is a lawsuit, with the company being liable instead of the LLC owner or owners.
When an LLC ventures into a new market or new area, it often makes sense to create a subsidiary LLC, so that it can have a clear focus on one market share or product and promote itself separately from the parent company.
A subsidiary is a company owned by another company, the parent LLC. The parent LLC owns at least 50% of the voting stock of the subsidiary. The subsidiary enjoys all the same benefits that the parent LLC enjoys in terms of pass-through taxation and liability protection.
How to create a subsidiary
Creating a subsidiary is very similar to the process you followed to set up your LLC. To create a subsidiary, you will first need to choose a name for it. You must select a name that is not registered by any other company in your state (and it cannot have the same name as your parent company).
Do a name search on the state secretary of state website to ensure the name you’ve chosen is available.
The name of the subsidiary must include one of the phrases: “limited liability company,” “limited company,” “LLC,” or “LC,” depending on your state requirements.
Complete articles of organization
Get a copy of the articles of organization form from your state secretary of state website and complete it for your subsidiary. The form will ask you to name the subsidiary LLC members, the address for the business, and the person authorized to receive legal documents for the company (called the registered agent).
List your parent company as a member of your subsidiary since they have a stake in the LLC ownership. The parent company might be the only member, or you might have other members, such as individuals or other companies.
When you sign the form, be sure to sign it with your name and role in the parent company, such as “Sally Smith, president of Parent LLC.” Submit your documents to the state with the required fees. Once they are approved, your subsidiary is official.
Finalize the details
Determine if you need to apply for county or city permits or business licenses to operate your subsidiary or if you can operate under the parent company’s licenses if a license is required.
For your own use, you need to write an operating agreement for the subsidiary that specifies the relationship between the parent company and the subsidiary.
This agreement lays out the specifics of the company, such as the management structure and member responsibilities. You do not need to file this with the state, but you will want to have it, so there is no question about the company's ownership or responsibility for debts.
A subsidiary can be a useful addition to your LLC and can allow your company to grow and expand.
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