Can an LLC Own Another LLC?

If you are thinking of starting a business or multiple businesses, you might be wondering whether a limited liability company is the right way to structure your business.

After all, an LLC offers many benefits, such as liability protection in cases of legal judgments and business debts, specific tax advantages, and a flexible management set-up.

But do you have to stop at one?

An LLC can own multiple LLCs, and in that case, the owner LLC is referred to as the master entity or the holding LLC, while its subsidiaries are called LLC cells. Any LLC owner in this terminology is referred to as the LLC member. This can be an individual, a corporation, a foreign entity, or another LLC.

Benefits of an LLC Owning Another LLC

The main idea behind starting an LLC is that your business will have to fulfill minimum requirements in terms of reporting to the government, and it will be easier to manage. It also improves your credibility with potential clients, partners, investors, or lenders.

With an LLC, your business will have a separate credit file, and, thanks to that, you can apply for various loans to finance your business ventures. But what if your business ventures come with markedly different levels of risk?

Here we come to the key benefit of creating a subsidiary of an LLC: By doing so, you minimize the financial risk in case one of your subsidiaries gets into financial or legal trouble. If one of your LLCs loses its value, that will not affect the others in any way, nor will it jeopardize the master entity and its assets.

To clarify this point, let’s imagine you operate three different lines of business under one LLC. If one of those businesses gets sued, the other two would also be liable for that lawsuit.

Multiple businesses under one LLC are, in a way, similar to a system of communicating vessels. But if you separate them, you are also separating their accountabilities and their assets, which can be a life-saver in case of a lawsuit.

The aggregation of different LLCs under one LLC owner is when you have the master or the umbrella LLC and the separate LLCs under its control. This structure allows subsidiaries to enjoy the benefits of being part of a larger company.

This comes in handy when, for example, a subsidiary wants to borrow money. As part of a larger holding company, it would be eligible for better interest rates and terms.

Disadvantages of Having a Parent LLC and Subsidiary LLCs

So, there are some weighty reasons in favor of having multiple LLCs as parts of the same entity. However, this solution is not ideal for everyone. Multiple LLCs mean a lot more paperwork.

The costs are higher, too, since each new LLC requires a filing fee, and you’ll have to file a form for each. Each of them also needs to have its own bank accounts, payroll, records, and tax documents.

And even if your parent LLC is protected in case one of your subsidiaries gets sued, the protection doesn’t flow both ways: If the parent LLC gets sued, creditors can go after the subsidiaries’ assets.

Types of LLCs

These are the most common examples of LLCs:

• A domestic LLC - does business in the state where it was initially formed.
• A foreign LLC - operates outside its country of origin.
• A professional LLC - provides professional services and requires at least one member to be licensed by the state for that particular profession; these LLCs are usually formed by architects, engineers, lawyers, veterinarians, and so forth.
• A series LLC - a group of separate entities under one LLC parent company.

How To Start an LLC

To start the process of forming an LLC, take the following steps:

1. Pick a name for your LLC. You need to make sure that the name is not already in use and, in certain states, this name needs to end with the LLC designator.
2. Choose a registered agent - an individual or a company that gives consent to accept legal papers on behalf of your LLC. In case you need some help with finding a registered agent, you can look into online legal services and what they have to offer.
3. File the Articles of Organization (the formal application for legally establishing the existence of your LLC or LLC subsidiary in the state in which it does business). This form can be filed online. The filing fee is typically around $100.

As you can see, the process is relatively straightforward, but if you are still unsure how to proceed, you can always seek the help of an LLC business formation service.

Be advised, however, that in California, Delaware, Maine, Missouri, and New York, you are also required by law to have an operating agreement for your LLC - an agreement establishing how your LLC is going to be run and managed.

Read our comprehensive guide on how to form a limited liability company.