Can an S Corporation be a member of an LLC?
S corporations and LLCs both are considered “pass-through” business entities from a tax perspective. This means that they are not taxed directly and their income is passed through to their shareholders and members and taxed at individual level. Even this is something both business entities have in common, there is a distinctive difference regarding the possibility of one owning the other (if an S corporation can own an LLC and if an LLC can own interests in an S corporation).
The S Corp.–LLC Relationship: S Corporation Ownership Rules
Because an S corporation is a federal tax designation it has strict requirements governing ownership set by the IRS. The question of whether an S corporation may be owned by an LLC is resumed to the following condition: an S corporation cannot be owned by a business entity such as a corporation or a partnership, but it can be owned by an individual as long as it is an U.S. citizen or permanent resident.
LLC Ownership of an S Corporation
Can an LLC own interests in an S corporation? IRS has strict requirements for S corporations that can complicate an ownership relationship between an S corporation and an LLC. Whether or not an LLC can have interests in an S Corporation is debatable and different from case to case.
Multi-member LLCs. All LLCs with more than one member are taxed as partnerships unless they have required to be taxed as corporations. Since neither partnerships, nor corporations are allowed to own an S corporation, no LLC with more than one member can either.
Single-member LLCs. If you are the sole member of an LLC, the income is passed to you and taxed in your hands. If you can or cannot hold ownership interest in an S corporation, it depends in this case on how you have elected to be taxed as an LLC:
- If you are the sole owner of an LLC, but you have expressed the choice of being taxed as a corporation or as a partnership, you cannot have an ownership interest in an S corporation.
- If you are the sole member of an LLC and you are a U.S. citizen or permanent resident, therefore eligible to own an S corporation, your LLC can have ownership interest in an S corporation.
When can an S Corp. own an LLC?
And how complicated are things in this combination? The conditions required for an S corporation who plans to own an LLC vary from state to state, but generally an S corporation will be eligible to become a member of an LLC. The main issues arising from this option is the tax treatment that will result from this combination of business entities:
- If the S corporation is the sole owner of the LLC and the LLC has not required to be taxed as a corporation, then the taxation will be applied to the income after it has flown in the hands of the S corporation making the LLC a disregarded entity from this point of view.
- If the LLC has two or more members, then it will be treated as a partnership and the taxation will be applied on the income received by its owners.
- If the LLC has chosen to be taxed as a corporation then the LLC will be taxed separately as a corporation.
How Does an S Corp. benefit from being a Member of an LLC?
Because both LLCs and S corporations are taxed as “pass-through” entities, there are no obvious advantages for an S corporation owning interest in an LLC. Advantages may arise only into certain situations from the flexibility of managing a business through an LLC such as the freedom of negotiating ownership percentages independent of the amount invested in the company.