By A corporation is a distinct type of business structure from an LLC. However, both are popular for their advantages regarding taxes.
Do you have your business registered as S Corp? If the answer is yes and you want to own an LLC, you are at the right spot.
First of all, you need to know: Can an S corporation own an LLC or not?
Well, I got your back here. Keep reading!
Yes, S corps can enroll in business with other entities like LLCs. It is because of their individuality. S corps can run a business with the ownership of actual individuals. However, LLCs will perform as individual investors.
LLCs are way more flexible in adding other shareholders to the businesses. As the parent company, S corp can undoubtedly own an LLC and enjoy additional advantages.
The S corporation can hold either partial or full ownership in the LLC. Also, the LLC can be treated as a disregarded entity for tax purposes.
According to the IRS, S corp can own both single-member LLCs and Multi-member LLCs. Single member LLC is known as a “disregarded entity” in terms of serving tax purposes. Also, multi-member LLCs can be taxed on pass pass-through basis.
To do this, one must go through LLC terminology. As both of them have similar tax advantages, there will not be IRS restrictions as well.
Pause before moving ahead. Do you know how an S corporation can own an LLC?
Explore here:
- Determine ownership structure
- Create an LLC by filing the necessary formation documents with the state
- Invest in the LLC by contributing capital, assets, or both
- The ownership interests acquired by the S Corporation must be appropriately documented.
- The S Corporation will need to report its share of income, losses, deductions, and credits from the LLC on its own tax return, typically by filing the IRS Form.
Why People Choose LLC As A Business Entity?
I am sure you know about LLC. Still, You must know the most magical things that you can do with an LLC for your business.
In simpler words, LLC advantages are providing liability protection, tax advantages, and fundraising and flexible opportunities.
It will ensure that your business does not affect your property during vulnerable times.
Besides, it provides a separate legal identity to the business, limited compliance, professional service, and ease of management.
Can An LLC Own An S Corp?
In most cases, an LLC can not own an S corporation.
However, it is possible in specific cases. Generally, S corporations are quite restrictive regarding adding shareholders.
A multi-member LLC is never permitted to own any share in S corp. However, it can only be eligible to single-member LLCs, according to ISR.
LLC’s income passes through to the sole member, who reports it on their tax return. This allows the LLC to own an S corporation without needing separate tax filings or considerations.
Before you decide, consider learning about managing an LLC under an S Corp. This might help you with a complete guideline throughout the process.
Why People Choose S Corp As A Business Entity?
S corp is a business entity that is permitted under the tax code. It also aims to protect the personal assets of business shareholders.
However, there are certain limitations in the case of adding shareholders. As, S corps will allow a maximum of 100 shareholders of a business.
You can also check other S corporation advantages to know why people choose this particular business entity over others.
Specifically, having an entity of S corp will ensure social security and benefit you with Medicare taxes, pass-through business status, and limited liability.
What Are The Differences?: S Corp. vs. LLC
Quickly check this table to know more about LLC and S corporation differences. As these have similar aims for business, confusion is expected between them.
I will mention some key differences to make clear how they are different from one another.
Basis Of Comparison | LLC | S Corp |
|---|---|---|
Ownership | Owned by own members | Restrictive and rely upon shareholders |
Management Structure | Day to Day decisions managed by an elected LLC member | Regular reporting to all the stakeholders is mandatory. Shareholders themselves officers are assigned to do the job |
Recordkeeping | No formal records are mandatory. Annual reports are required. | Mandatory and holistically presentation of records is are must |
Transferring ownership | Has specific paperwork and restrictions | No required restrictions |
Taxation | Self-employment taxes | Adapts payroll taxes through compensating owners through a combination of salary and distributions. |
Note: LLC is more suitable for a flexible, formal business entity with fewer administrative requirements.
On the contrary, S corp is preferable if you want to concentrate on constant income and avoid double taxation issues with attracting investors.
Why Would an S Corporation Own an LLC?
Although both the business entities share certain types of similarities, still some business owners of S corp want to enjoy the advantages of LLC.
Let’s see what are those specific benefits that LLC has to offer S corps:
- LLC gives way more flexibility in transforming ownership. In the case of protecting valuable assets from liabilities or creditors.
- If you want to diversify your business and want to launch new product lines, LLCs are excellent. They can create a line of separation between your core company and venture.
- LLC gives flexibility to the owner to distribute profits. It gives freedom to the owner to consider business factors, investments, and members’ opinions.
Are There Any Restrictions on an S Corporation Owning an LLC?
Generally, S corps owning LLC reduces the restrictions of a business. However, there is one certain restriction to follow.
S corps are allowed to have 100 shareholders or less. So, even if S corp is adding LLCs as shareholders, the number should not exceed 100.
Frequently Asked Questions
In terms of tax advantages, there is no attractive offer that LLC and S corp can individually offer. However, if an S corp business thinks flexibility is their priority, they can choose LLC. LLC can be especially beneficial in case of changing ownership and bargaining the percentage of ownership.
Yes, LLC can be taxed as an S corp. This is an option available for LLCs that meet specific requirements. First of all, the LLC must file a form 8832.
This eligibility will be mentioned in the IRS’s 2553 instruction form. Filling out this form will ensure whether your business is eligible to get that S-corp status.
