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
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.
For more information on How to Form an LLC:
- Election of LLC as an S Corporation or C Corporation?
- S Corporation vs. LLC: Which Structure is Right for Your Business
- Member Resignation and Dissolution of LLC
- How to Handle Resignation of LLC Member
- Forming an LLC and Electing to be Taxed as an “S” Corp
Recommended Resources on How to Form an LLC:
- Agency, Partnership & Liabilitiy Companies (Concepts & Insights)
- Surprisingly Simple: LLC vs. S-Corp vs. C-Corp Explained in 100 Pages or Less
- Nolo’s Quick LLC: All You Need to Know About Limited Liability Companies
- Form Your Own Limited Liability Company
Category: Q & A