Whether you’re just starting your business or looking to restructure an existing company, choosing the right legal structure is crucial. Many entrepreneurs wonder if combining a C corporation and an LLC offers advantages. Can a C corp own an LLC?
The short answer is yes, a C corp can own an LLC. This structure gives you the liability protection and tax benefits of an LLC along with the funding and growth opportunities of a C corp.
Let’s explore the ins and outs of having a C corp own or operate an LLC.
How C Corp Ownership of an LLC Works
A C corp can be the sole member of an LLC, giving it full ownership and control. Often C corps own LLCs when they have different projects, partners, joint ventures, subsidiaries or operating units.
For tax purposes, the LLC would be disregarded if the C corp parent is the only member. All the LLC’s revenue and expenses would be reflected on the C corp’s tax return.
If there are multiple members, the LLC’s profits and losses are passed through to the members based on the operating agreement.
What is an LLC (Limited Liability Company)?
LLCs became popular in the 1970s as business owners sought liability protection and tax benefits. LLCs offer:
- Flexible management – No limits on number of owners.
- Personal liability protection – Owners not personally responsible for debts.
- Pass-through taxation – No corporate taxes, owners pay personal income tax.
- Easy to form – Less requirements than a corporation.
Banks and insurance companies generally can’t form an LLC. Regulation happens at the state level.
C Corp Advantages and Disadvantages
Advantages of C corps include:
- Liability protection for owners and investors.
- More funding options like issuing stock.
- Tax benefits like income splitting.
- Streamlined structure to enable growth.
Potential drawbacks include:
- More complicated than LLCs.
- Double taxation of profits.
- Subject to more regulations.
- Less flexible management.
Benefits of Combining an LLC and C Corp
There are several reasons a C corp may want to own an LLC:
The LLC protects the C corp owners from liability for debts and lawsuits that arise from the LLC’s operations.
The LLC structure allows for more flexible management of that entity compared to strict corporate requirements.
A C corp can quickly form an LLC to explore new business ideas or ventures without much paperwork.
Keep Operations Separate
Using an LLC can segment different operations, products, partners, assets or projects from the C corp for legal and tax purposes.
LLCs allow more privacy in some states, with less public reporting of owners and financial details.
Setting up the C Corp and LLC
If a C corp wants to own an LLC, the LLC must be properly established first.
The LLC’s articles of organization must be filed with the state and include:
- Name of LLC
- Registered agent
- Names of members
The C corp can then become the sole member of that LLC, giving it full ownership and control.
The LLC members should enter an operating agreement detailing governance and operations.
Holding Company and Operating Company Structure
A common C corp and LLC structure is using separate holding and operating companies:
- The C corp is the holding company, owning the assets.
- The LLC is the operating company, leasing and using the assets.
This allows the C corp owners to protect assets from any debts and liabilities of the operating LLC company.
Professional vs Traditional LLCs
Most states don’t restrict C corp ownership of an LLC. However, Professional LLCs (PLLCs) for services like medical, legal, and accounting do have ownership requirements.
C corps cannot be members of a professional LLC – all members must be licensed professionals.
Why Corporations Choose to Form LLCs
- Tax and reporting advantages – LLCs allow more privacy in some states, requiring less public reporting.
- Test new ventures – Quickly and easily set up an LLC to explore new ideas.
- Segment operations – Use LLCs to separate different operations, products, partners or assets.
- Joint ventures – LLCs are useful for collaborations between companies.
- Subsidiaries – LLCs allow C corps to create distinct business units under the corporate umbrella.
C Corp Advantages Over LLCs
While LLCs serve many purposes, C corps have distinct advantages:
- Raising capital – C corps can sell stock and attract more investors.
- 401(k) business financing – Can use ROBS financing from 401(k) funds.
- Potential tax benefits – May have lower corporate income tax rate.
- Perpetual existence – C corps continue after owners leave.
- Prestige – C corp structure signals an established business.
Should You Choose a C Corp or LLC?
Choosing between an LLC, C corp or combining the two depends on your specific business goals and needs.
LLCs offer easy formation, flexibility, and tax pass-through status. C corps provide liability protection for shareholders, easier access to capital, and greater structure.
Talk to legal and tax professionals to determine if a C corp owning an LLC makes sense for your enterprise. With the right business structure, you can set your company up for success.
Structuring your enterprise with a C corporation owning an LLC provides the liability protection and tax flexibility of an LLC combined with a C corp’s funding opportunities and growth potential.
Consult with legal and accounting professionals to determine if this business structure matches your objectives. Carefully follow registration requirements and document formation steps when establishing the entities.
With thoughtful planning, a C corp owned LLC can position your company to flourish.
Frequently Asked Questions
Can an LLC own a C corp?
Yes, an LLC can also own a C corp, making the C corp a subsidiary of the LLC. The LLC would be the parent company in this structure.
How is a C corp owned LLC taxed?
If the C corp is the only member, the LLC is a disregarded entity. If there are multiple members, the LLC is taxed as a partnership.
What documents are needed to set up a C corp owned LLC?
You need LLC articles of organization, an LLC operating agreement, and C corp formation documents like articles of incorporation and bylaws.
Can the LLC keep its profits or do they flow to the C corp?
Profits and losses can stay within the LLC, or the operating agreement can dictate funds being distributed to the C corp owners.
Can a C corp and LLC have the same name?
Yes, as long as there is a distinction like “ABC Corp” and “ABC LLC”. Check state regulations.
Lyle Solomon has considerable litigation experience as well as substantial hands-on knowledge and expertise in legal analysis and writing. Since 2003, he has been a member of the State Bar of California. In 1998, he graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, and now serves as a principal attorney for the Oak View Law Group in California. He has contributed to publications such as Entrepreneur, All Business, US Chamber, Finance Magnates, Next Avenue, and many more.