QUESTION ON How to Limit Liability and Gain Tax Advantage For Corporations
I have three small business operating as corporations and my objective is to find the best protection — e.g. limit liability — and gain tax advantage. My question, firstly is whether I can open up a parent holding company, a LLC, (can a holding company be an LLC?) which will then own the three corporations.
Secondly, should I open that parent LLC and make each of the three corporations LLCs also or do I really need to have a parent LLC or can I just convert the three corporations into three LLCs without opening a new umberella parent LLC.
Thirdly, one of the three corporations can convert into an LLC and own the other two. Again, the other two can remain as corporations or become LLCs. I own all three companies and I intend to be the boss in whatever direction I choose to go into with the structure change. Please advise….
An LLC can certainly be a holding company. An LLC can own corporations or other LLCs. How to structure your businesses will depend in large part on your desired tax treatment.
Corporations that are owned by an LLC are still taxed separately at corporate income tax rates (and the parent LLC in such a case is treated as a shareholder of the corporation).
LLCs are pass-through tax entities (see IRS publication Forming a Limited Liability Company (LLC)), so in the case of LLCs owned by another (parent) LLC, the income of the subsidiary LLCs would pass through to the parent LLC (and, in turn, would be taxed as income to the owner of the parent LLC).
Conversion of a corporation to an LLC is a separate issue altogether. Some states allow for the statutory conversion of a corporation to an LLC (by filing conversion documents prescribed by the state–check with the office of the secretary of state in the state of incorporation), but many states do not. In states where a statutory method of conversion does not exist, one may have the option of either 1) forming an LLC and effecting a merger between the existing corporation and the new LLC, with the new LLC being the surviving entity, or 2) dissolving the existing corporation and forming a new LLC altogether.
The first option tends to be more laborious in terms of the amount of paperwork involved–and the use of an attorney to properly draft a plan of merger and file the appropriate merger documents is highly recommended. Also, certain corporate transactions including mergers can also result in a taxable event, therefore you should consult a CPA for guidance. The second option is more straight-forward; just keep in mind that, with the corporation’s dissolution, you will lose the corporation’s history (since it will cease to exist), and you will have to properly wind up affairs of the business.
Recommended Resources on How to Form LLC:
- LLC or Corporation?: How to Choose the Right Form for Your Business
- 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
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