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.
Additional Information You May Find Useful
If you want additional information about how to maximize the tax savings related to running a business or investment venture, you may also be interested in one of our downloadable e-books (see descriptions below). Each book covers a category of tax planning topics that easily save a business owner significant amounts of income or self-employment taxes (potentially thousands of dollars a year) and is instantly downloadable.
Often the best tax saving tool private companies have? The Section 199A deduction which allows them to avoid taxes on the last 20 percent of their income.Read More
Using an S corporation for your business? To maximize savings, you need to minimize the salary paid to shareholders. But this decision is tricky.Read More
Nearly secret, the federal government's employee retention credits provide tremendous payroll tax savings for most small businesses... A new book from our firm explains.Info here