Can a Subsidiary LLC be a Managing Member of Its Parent LLC ?

March 12, 2005 | By | Reply More

QUESTION ON Can a Subsidiary LLC be a Managing Member of Its Parent LLC ?

Can a subsidiary LLC be a managing member of its parent LLC ? That is, I have a parent LLC and it is a managing member of a sub LLC then the membership of the parent LLC is updated by including the sub LLC as a managing member of the parent LLC. What would be the pros and cons of this arrangement ? A response would be most appreciated. Thank You

– John Patermus, Florida

Business woman with staff

ANSWER

Dear John,

An LLC can be owned in whole or in part by another LLC, so it is possible to issue membership interest in the parent LLC to the second LLC. However, it creates a very unusual structure.

The nice thing about LLCs is the pass-through taxation they provide; in the case of a subsidiary LLC that is wholly owned by a parent LLC, all of the net taxable income of the subsidiary LLC flows up to the parent LLC and, in turn, flows up to the owner(s) of the parent LLC for tax purposes. This makes tax preparation slightly less cumbersome because, rather than having to prepare tax schedules for each separate LLC, only one is prepared.




But what would happen in the scenario you propose? Net taxable income of the subsidiary LLC would flow through to the parent LLC; but, from there, the income would flow right back to the subsidiary LLC–since it would be a member of the first, “parent” LLC–and whomever else is a member of the first LLC. It seems awfully complicated and it’s unclear what the motivation would be for setting it up this way.

If you are concerned about liability protection, I would recommend that you consult an attorney to help you devise an asset protection strategy and properly structure ownership of your LLCs.

Chrissie Mould

 
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Chrissie Mould

Chrissie Mould has over a decade of experience in business administration and startup business consulting. She has helped launch companies in multiple industries and has managed corporate administration and governance for public and private companies. She is an incorporation specialist with MyNewVenture.com LLC. The company provides low-cost incorporation services to entrepreneurs and small businesses.

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