QUESTION on How to Form LLC as Parent Company
I am attempting to develop a business structure for a possible client and would like to ask if the following proposal is legitimate. The client owns 4 developed properties, each with equity and debt, all of which I would like to roll intro an LLC. My question is if this new entity can then be split off into 2 separate LLC’s, one to hold the equity and the other to hold the debt and income stream from the properties. Any information you may provide would be greatly appreciated.
– Brian Mangan (Georgia)
It is possible to use multiple limited liability companies to set up a parent-subsidiary business structure. One LLC may be formed to serve as the parent company, and one or more separate LLCs may be formed with the parent LLC as the member (owner) of each LLC to create the parent-subsidiary structure. Because LLCs are pass-through entities for tax purposes, the net taxable income of a subsidiary LLC would flow through to the parent LLC and would be taxed accordingly. If the parent LLC is owned by an individual, all of the net taxable income from the LLCs would ultimately flow through to the individual and would be taxed at the individual’s income tax rate.
LLCs can generally be used for either business purposes or investment purposes. For example, a property management company can be set up as an LLC if the business owner so chooses. Also, an investor can form an LLC to hold real estate property for asset protection purposes.
However, instead of forming one LLC to hold multiple properties, many real estate investors seeking to maximize asset protection benefits form separate LLCs for each property that they hold as a form of risk management. By doing so, they create a buffer of sorts between each property–if one LLC were to be faced with a debt, claim or judgment, only the assets held by that LLC would be at risk; properties held by other LLCs would remain untouched.
It should be noted, however, that if one parent LLC owns all of the property-holding LLCs, it is possible that the interest in those subsidiary LLCs (and, by extension, the properties that they hold) could be placed in jeopardy if the parent LLC ever were to be faced with a debt, claim or judgment (since the parent LLC’s assets would consist of its membership interest in the subsidiary LLCs).
This is only one piece of the larger asset protection puzzle. You should consult a qualified attorney who specializes in asset protection strategies and/or estate planning for assistance in developing a comprehensive asset protection plan.
Recommended Books on How to Form LLC:
- Nolo’s Quick LLC: All You Need to Know About Limited Liability Companies
- Ultimate LLC Compliance Guide: Covers All 50 States (Entrepreneur Magazine’s Ultimate Books)
- Your Limited Liability Company: An Operating Manual
- Limited Liability Companies For Dummies