Smart entrepreneurs with fingers in multiple ventures often try to limit liability exposure from spreading across different projects. With the proper legal structures in place, if one venture fails, it doesn't take down the entrepreneur's entire business empire. Using a parent-subsidiary structure for two related business endeavors ensures that judgments against a limited liability company subsidiary typically can't reach the assets of the parent.
Independent Legal Status of LLCs
Under state laws, an LLC is a business entity that has independent status apart from its owners, known as members. The company transacts business under its own name, such as entering into contracts and owning real property. The members enjoy limited liability for business affairs and typically can't be sued personally for transactions conducted in the name of the LLC. Using the LLC structure to conduct business ensures that business creditors and other claimants can't go after the personal assets of the members; only the amount of money that each member has invested in the LLC is at risk.
A subsidiary is a company that is wholly owned or majority-owned by another company, known as the parent. An LLC subsidiary can be owned by another LLC or by a corporation. In either case, the LLC continues to exist as an independent legal entity. The parent-owner corporation is simply the LLC's sole or majority member, and as such, it enjoys the same limited liability benefits as any ordinary individual LLC member.
Read More: How Do I Create an LLC Subsidiary?
Suits Against LLC Subsidiaries
The parent of an LLC subsidiary is responsible for ensuring that the subsidiary is properly managed and can be involved in its day-to-day decision-making in the same way as any individual owner of an LLC. However, the LLC's status as an independent legal entity typically prevents the company's creditors and other claimants from pursuing lawsuits against the parent-owner stemming from normal business transactions, even if the parent had to authorize or otherwise arrange for the LLC's acts. Generally, business claimants must sue the LLC and can collect judgments only from the assets that the subsidiary owns.
Parent Liability Under Certain Circumstances
Limited liability for owners of independent legal entities, such as an LLC, is not absolute. Business owners can be sued personally if they engage in wrongful or illegal activities that fall outside of the scope of ordinary business transactions or if they fail to observe the legal formalities that establish the business's independence from the owners. For example, the parent of an LLC subsidiary may be liable if it authorized the LLC to engage in illegal dumping that poisoned a river. Also, creditors can ask a court to "pierce the veil" and reach into the parent company's pocket to satisfy a judgment against a subsidiary if the parent failed to allow the subsidiary to operate with sufficient financial independence.
Terry Masters has been writing for law firms, corporations and nonprofit organizations since 1995, specializing in business topics, personal finance, taxation, nonprofit issues, and general legal and marketing content creation for the Internet. Terry holds a Juris Doctor and a Bachelor of Science in business administration with a minor in finance.