Can an S Corporation Own an LLC? (or "Be an LLC Member"?)

Rather than give you just a three sentence answer to this question, however, let me guess about where the question comes from... and then let me provide a bit of elaboration about how the tax accounting works when an S corporation becomes a member in an LLC.

LLC Membership (or Ownership) Only Seems Wrong

First of all, let me say this: I'm going to guess that people who ask this have heard that S corporations have very strict rules about who can be a shareholder in the S corp. And that's true. But there aren't strict rules about what the s corp can itself own.

Accordingly, while a partnership or an LLC taxed as a partnership can't own an S corporation, an S corporation can own an interest in a partnership or an LLC taxed as a partnership.

Similarly, while a corporation can't in almost all situations own an S corp, an S corp can own a corporation.

Sometimes people really struggle with this answer, so let me say this just one more way: Just because there's a rule that says A can't own B doesn't mean that B can't own A.

Tip: If you want more information about who can and can't be an S corporation owner, see this FAQ article: Who Can Be an S Corporation Shareholder?

Accounting for LLCs Owned by S Corporation Members

How an LLC owned by a S corporation gets treated for tax accounting purposes, however, varies depending on how the LLC is treated.

For example, if an LLC is only owned by single S corporation, the LLC is disregarded if it hasn't made an election to be treated as a corporation.

Just so you know, "disregardization" means the LLC's income and deductions just get added to the S corporation's other income and deductions. For all practical purposes, the LLC "disappears" as a taxable or tax reporting entity.

If an LLC is owned by several members and the LLC has not made an election to itself be treated as a corporation, then the LLC is treated as a partnership. This means that the LLC will prepare and file a partnership tax return. Each of the partners or members in the LLC (including any S corporation members) will receive a K-1 from the LLC partnership. And the K-1's income and deductions will be reported on the member's regular tax return.

If an LLC owned by an S corporation has made an election to be treated as a corporation, the LLC files a corporation tax return. But the taxes on any LLC income get paid with the regular 1120 C corporation tax return. The S corporation's accounting and taxes probably aren't affected by what's happening inside the "LLC taxed as a corporation." Essentially, the "LLC taxed as a corporation" is just another "investment" owned by the "parent" corporation.

Let me just for sake of thoroughness mention a related wrinkle: An LLC owned by a single S corporation could also be treated as a Qualified Subchapter S Subsidiary (also known as a QSUB) if the LLC and the member file the appropriate paperwork and if the LLC had prior to acquiring the S corporation member been treated as an S corporation. In this case, the QSUB's income and deductions just get reported on the "parent" S corporation's return. (Check out this FAQ article if you more to learn more.)

A Related Question: Can an LLC Own an S Corp Then?

Not to go off on a wild goose chase here, but while we're on the subject of whether an s corporation can own an LLC, let me discuss the flip-flopped situation: Can an LLC own an s corp?

The answer to this question is sort of hinted at in the preceding paragraphs. As noted, s corporations have pretty strict rules about who can and can't be a shareholder. Partnerships and corporations can't, for example, be shareholders. U.S. citizens and permanent residents (and a handful of other entities) can.

So here's what this means: If an LLC has multiple owners (or members) and is therefore treated as a partnership (this would be the default), that LLC can't own shares in an S corporation. Why? Because a partnership isn't an eligible s corp shareholder. Period.

The same rule holds true for corporations, too. A corporation can't be an S corp shareholder. So an LLC treated for tax purposes as a corporation can't own an S corporation.

Things get a little trickier if you're talking about a single member LLC that's not made an election to be treated as a corporation... and here's why: Such a single member LLC is disregarded or ignored for tax accounting purposes. So that means the real question is whether the single member LLC's owner is an eligible s corporation shareholder. If the member is, then the LLC can be an eligible s corp shareholder. For example, if a single member LLC is owned by a U.S. citizen or permanent resident (both eligible shareholders), then the LLC can own shares in the s corporation. No problem.

However, if the single member LLC is owned by someone or something that is not an eligible shareholder--like a nonresident alien or a partnership or a corporation--then the single member LLC can't own shares.

Want a Downloadable Kit for Setting Up an LLC?

A quick, tangential point: If you're interested in setting up an LLC for use with an S corporation, you may be interested to know that just as we publish downloadable kits for setting up S corporations, we also publish downloadable kits for setting up limited liability companies. You grab the LLC kits, however, from another website. Click here if you are interested.

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Additional Information You May Find Useful

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