Parent LLC Vs. Stand-Alone LLC
Limited Liability Companies have become a popular choice of business structure for small business, particularly start-ups run as simple partnerships or sole proprietorships. LLCs are regulated by the states, but generally owners, called members, can be individuals, corporations, and even other LLCs. The basic advantage of an LLC is that it provides liability protection to the members like a corporation, but passes taxation through to the members without taxing the company itself, same as a partnership.
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An LLC is simple
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The key advantage of an LLC is that it is a simple structure to set up, without much of the paperwork or reporting requirements of a corporation. In most states, the form to set up an LLC is available online, and can be filled out quickly. Yet despite its simplicity, it still protects the members' assets from the debts and obligations of the company.
Parent LLC not so simple
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While the business structure is technically the same, protection from liability may not be. A blog written on the website for the law firm KEYTLaw argues that parent-subsidiary LLCs can run into problems by not being able to keep assets separate in each company. The blog cited a January 2010 Florida Appeals court ruling to show a parent LLC could be held liable in the courts for the debts of its wholly-owned subsidiary. With two stand-alone LLCs, one company would not be liable for the debts of another, even if the members of both LLCs were the same.
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Taxes still pass through
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The U.S. government does not recognize an LLC for tax purposes, so that taxes from profits are passed on directly to its members and reported on each member's tax forms, avoiding an additional tax on the company itself. In this way, it's treated as a partnership, or in the case of a single member LLC, a sole proprietorship. For a subsidiary LLC, profits are passed on to the parent LLC, and then onto the parent's members, without additional taxes on either company.
Flexibility
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An LLC has additional flexibility in that it can elect to be taxed as a corporation rather than as a sole proprietorship or partnership. There are circumstances where such an election on its federal tax form can be advantageous. With parent-subsidiary LLC structures, each LLC still has that option. A subsidiary, for instance, could be taxed as a corporation, but the parent taxed as a partnership. But such choices need to be made carefully for the additional complexity it adds to the business structure.
Get advice
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While getting advice from an attorney or an accountant is always a good idea, starting up a business as an LLC can be done with relatively little guidance. Deciding to form a subsidiary LLC under a parent LLC adds enough issues and complications where legal and accounting advice becomes vital.
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