S corp FAQ: Can an S corporation be a member in an LLC?

Can an S corporation be a member in an LLC?

The short answer to this question is "yes." An S corporation can be a member in an LLC, or limited liability company.

Rather than give you just a one 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.

S Corporation LLC Member Only Seems Wrong

First of all, let me say this: I'm going to guess that people who ask the question about S corporations as LLC members have heard that S corporations have very strict rules about who can own the S corporation entity. And that's true. But there aren't strict rules about what an S corporation 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 a partnership and an LLC taxed as a partnership.

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

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 or S corporation. That "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 entity.

If an LLC is owned by several members--say several other S corporations--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 S corporation's 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 that return. The S corporation's accounting and taxes probably aren't affected by what's happening inside the LLC. Essentially, it's just an "investment" owned by the "parent" S corporation.

One final comment about this "S corporation as an LLC member" stuff: 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.

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