So, you operate a small business in these unprecedented times of pandemics. And it’s risky, of course. Would it be less risky if you opened another limited liability company? Can an LLC own another LLC? Is it even legal?
In a nutshell: Yes. Not only that it’s possible and legal, but it’s an excellent idea, especially if you own several business lines. If you have multiple business ventures, and these come with various levels of risk, forming a subsidiary LLC for each of the ventures will minimize risk: If one of them fails, the assets of the others will be protected.
But let’s start with the basics: What is a subsidiary? What do the terms parent LLC and subsidiary LLCs even mean? If you’re not familiar with these expressions, let alone with regulations and requirements, worry not; We’ll walk you through all the steps and explain all the pros and cons of this business umbrella structure. Also, we advise you to take a look at this list of LLC service choices.
A limited liability company or an LLC is a business entity that offers flexibility and simplicity. It can be owned by individuals, corporations, other LLCs, or foreign entities. The number of owners (called LLC members) is not limited, and most states allow single-member LLCs.
But, how many LLCs can you have? And what are the benefits of having more than one?
The number of LLCs one person can register is not limited. Similarly, an LLC can own multiple businesses, run as separate LLCs, where the holding LLC is the master entity.
There are several types of LLC companies you can have:
If you wish to register an LLC, you can do it on your own, or choose a cost-effective legal service to help you with the registration process.
Essentially, there are three ways you can structure your business.
First of all, you can create individual companies for as many businesses as you wish, as there is no limit. Pick a suitable name that hasn’t been registered, choose a registered agent, and file the Articles of Organization. Each business will count as a stand-alone entity. This option can be an excellent choice for real estate businesses.
Secondly, you can create multiple DBAs under one LLC. In this case, the original LLC will not count as the LLC parent company. DBA stands for Doing Business As. It’s a kind of pseudonym for your business. Companies usually register additional business names because they want to operate under a shorter and more memorable name. Note that, by registering a DBA, you don’t create a new legal entity. If any DBA under your LLC is sued, the LLC is liable.
The third option is to form an LLC holding company by putting multiple businesses under one LLC; Creating a subsidiary of an LLC, or multiple ones, instead of opening new LLCs is a good idea because each individual LLC, including the holding LLC, will be protected from the others’ liabilities. If you transfer your assets to the holding LLC, they will be out of reach of the subsidiary LLC’s creditors, while a lease agreement can be signed so that the subsidiary LLC can still use them.
Once you go through all the possibilities and make a plan, we would advise you to find a bank to help your small business get on track.
The most significant advantage of this business structure would be minimizing the potential financial risk if one of your companies stumbles upon some bumps in the road. Once your subsidiaries are owned by a business entity that protects them, if any of them loses their value, it won’t jeopardize the master entity. And if one of the companies gets sued, others are safe from liability, which is a significant benefit.
On top of this, opting for an umbrella structure benefits your reputation, too. Your LLC owned by another LLC is more likely to get a loan from a bank, especially if it’s a startup. Being a part of a larger company gives you access to better rates and terms for bank loans. By the way, if you have a bad credit score but want to start a small or medium-sized business, check this list of banks that offer bad credit business loans.
Last but not least, each subsidiary has its own management, meaning that the holding company’s managers don’t need to manage them too. In fact, they don’t have to know anything about the subsidiaries’ day-to-day operation.
As always, there are downsides to the parent-subsidiary LLC structure as well. Owning multiple small businesses means much more paperwork when launching the LLCs, filing forms, opening and maintaining bank accounts, tax documents, payrolls… It also means higher costs, because you need to pay filing fees for each LLC you open.
Besides, creating a holding company and having subsidiaries won’t protect the subsidiaries from liability in case the parent company gets in legal trouble. Creditors might tap into the subsidiaries’ insurance coverage if the judgment exceeds the parent company’s insurance.
To sum it all up: An LLC owning another LLC represents a legal way of structuring your business but you should always consider all the possible benefits and disadvantages before restructuring your company in this way.
An LLC with a single member is treated as a disregarded entity. Since most subsidiary LLCs are single-member LLCs - their sole owner is their parent company - they are considered disregarded entities for tax purposes.
Yes, you can have as many businesses as you wish.
There is no limit to the number of LLCs you can register. Owning two is perfectly legal. And can an LLC own another LLC, again making you the owner of two LLCs, the parent company and the subsidiary? That, too, is possible and completely legitimate.
Yes. In that case, your primary company would be referred to as the parent company (also known as the umbrella LLC or holding company), and the subsidiaries are sometimes called cells.
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