Can an LLC Be a Member of Another LLC?

A Limited Liability Company (LLC) can legally be a member, or owner, of another LLC. This common business structure creates a parent-subsidiary relationship, where the owning LLC is the “parent” or “holding company,” and the owned LLC is the “subsidiary.” The parent LLC can be the sole member, creating a wholly-owned subsidiary, or it can be one of several members. This arrangement is highly flexible and used for strategic purposes, from isolating high-risk activities to managing distinct lines of business.

Common Structural Arrangements

A primary reason for an LLC to own another is to create a holding company structure. In this model, the parent LLC does not engage in day-to-day business operations. Instead, its main purpose is to own assets like real estate, intellectual property, or the ownership interests in the subsidiary LLCs that conduct business. This isolates valuable assets in the holding company, shielding them from the liabilities and debts incurred by the operational subsidiaries.

For example, a real estate investor might form a parent holding company that owns multiple subsidiary LLCs, with each subsidiary holding title to a single rental property. If a lawsuit arises from an incident at one property, the liability is contained within that specific subsidiary. This prevents creditors from seizing the other properties held by the parent company.

Another frequent arrangement is separating distinct business ventures. A company with multiple business lines can establish a separate subsidiary LLC for each one. This allows each venture to have its own management team and financial records. This structure insulates the financial performance and legal liabilities of one business from affecting the others.

Formation and Documentation Requirements

Establishing a structure where one LLC owns another involves standard formation steps, but with specific attention to how ownership is documented. The creation of the subsidiary begins with filing the Articles of Organization with the state. In this document, you must list the full legal name of the parent LLC as a member or organizer.

The ownership structure is detailed in the subsidiary’s Operating Agreement, an internal contract among the members that governs operations. The subsidiary’s Operating Agreement must clearly identify the parent LLC by its legal name and state its ownership percentage. The agreement should also detail the parent’s capital contributions.

The Operating Agreement also needs to define the management structure and the rights of its members. It will specify whether the subsidiary is managed by its members or by appointed managers. If the parent LLC is to have direct control over the subsidiary’s major decisions, these powers must be explicitly outlined in the agreement.

Tax Treatment and Reporting

The tax treatment of a subsidiary LLC depends on the number of members it has. If the parent LLC is the sole owner, the subsidiary is a single-member LLC. For federal tax purposes, the IRS treats a single-member LLC as a “disregarded entity.” This means the subsidiary does not file its own federal tax return, and all of its income, losses, and credits are reported directly on the parent LLC’s tax return.

When the subsidiary LLC has multiple members, its default tax classification is a partnership. In this scenario, the subsidiary must file its own informational tax return with the IRS using Form 1065. The subsidiary does not pay income tax itself; the profits and losses are “passed through” to its members.

Following the filing of Form 1065, the subsidiary LLC must provide each of its members, including the parent LLC, with a Schedule K-1. The Schedule K-1 details each member’s specific share of the partnership’s financial results. The parent LLC then uses the information from its Schedule K-1 to report the income or loss from the subsidiary on its own tax return.

The parent LLC’s own tax election also influences the overall tax flow. If the parent LLC has elected to be taxed as an S Corporation or a C Corporation, the income it receives from the subsidiary will be incorporated into its corporate tax return. This layered tax structure requires careful record-keeping.

Maintaining Legal Separation

To ensure the liability shield between a parent and subsidiary LLC remains intact, the two entities must operate as distinct businesses. Courts can disregard the liability protection in a process known as “piercing the corporate veil” if a subsidiary is found to be merely an “alter ego” of the parent. This can happen when the affairs of the two companies are so intermingled that the subsidiary has no separate identity.

A primary practice is to maintain completely separate finances. Each LLC must have its own bank account, and funds should not be commingled. All transactions between the parent and subsidiary, such as loans or service payments, must be formally documented and conducted at “arm’s length,” meaning the terms are fair and reflect what would be negotiated with an unrelated third party.

Each entity must also adhere to its own corporate formalities. This includes holding separate meetings for members and managers and keeping distinct records and meeting minutes. All contracts, leases, and agreements must be signed in the name of the correct LLC. Consistently observing these formalities demonstrates to courts that the two LLCs are legitimate, separate entities.