Can an LLC be a Parent Company?

Many people may wonder if an LLC can be a parent company of another. Well it can be, an LLC can be a parent company, provide subsidiaries limited liability protection, and reap the profits of subsidiary companies tax free.  

An LLC as a parent LLC

To answer the question quickly, LLCs can be parent companies of other LLCs or business subsidiaries. Creating an LLC parent company is rather simple, all one would need to do is list the name of the first LLC as an owner of another business subsidiary or company they are going to form. By doing this, the first LLC formed becomes an owner and member of the second LLC or business subsidiary formed. And an LLC can be formed in 6 steps, according to TRUiC, so in essence an LLC can become a parent company in those 6 steps. 

6 Steps to form an LLC

But quickly let’s go through the steps of forming an LLC in the US. The first thing anyone wanting to form an LLC must do is choose the state they would like their business to operate in, and choose a name for that business. It is important that the state chosen is done keeping in mind where you live and where you want to conduct your business. In choosing a name, there are certain rules and regulations one must adhere to, such as having “Limited Liability Company” or one of its abbreviations in the business name. Business naming rules and regulation vary for state to state, but more information can also be found on the US Small Business Administration website. The next step is hiring a registered agent. An LLC owner can act as his or her own LLC’s registered agent, but there is also the option of hiring an individual practicing as a registered agent, or a registered agent service. The LLC’s registered agent must however reside in the state in which the LLC is formed, and must be available during state business hours in order to receive any mail, legal documents, notices of lawsuits, tax forms and government correspondings, all together referred to as services of process, on behalf of an LLC. For business owners who do not reside in the state in which they want to form an LLC, a registered agent can also provide the LLC with a physical mailing address in the state in which the LLC is formed. After the first 3 steps, all that must be done is filing the LLC’s formation documents with the state (an Articles of Organization, a Certification of Formation, or a Certificate of Organization, depending on the state), and creating an Operating Agreement. An Operating Agreement in a legal internal document that basically outlines an LLC’s ownership configuration, management procedure, the distribution of profit and dividends, amongst other things. The final step to form an LLC is obtaining an Employer Identification Number (EIN) from the Internal Revenue Service (IRS), which can be done for free on their website. Once these 6 steps have been complete, an LLC is officially formed and may start conducting business in the US. 

As parent LLCs go, the first LLC formed becomes a parent company of any other business that is formed after it and where it is an owner of, which offers LLC owners and their subsidiaries some sort of advantages. For one, all profits of a subsidiary company pass straight onto the LLC, and then onto the LLC’s owner, and two the subsidiary’s, as well as the LLC’s profits are not taxed on a corporate level, instead all profits are taxed on a personal level when profits are reported on an owners income tax returns. 

The legal liability protection of a parent LLC and its subsidiaries 

If a subsidiary company is found liable or has a claim laid against it, this will not affect the parent LLC as it is a business structure that provides limited liability protection of an owner’s personal assets. Yet if it is the parent LLC that has a claim against it or is found liable, any one of the subsidiaries it is a parent company of will be at risk of financial or asset seizure because the subsidiary are assets of the parent LLC. So a parent LLC can protect its subsidiary LLC and business, by means of its legal liability protection, but once a parent LLC is in jeopardy, so too will its subsidiary business and other assets be in jeopardy or seizure.  

In forming a parent LLC, it is important to know how it will be affected by events of its subsidiaries and vise versa. But as far as form a parent LLC is concerned, it’s as simple as forming a standard LLC, using TRUiC’s 6 steps, and listing your primary LLC as its owner, or one of its members.