A limited liability company protects its members from liability for business debts. The LLC also provides a simple tax life for members: the company is not taxed separately and passes income directly to the members, who report earnings on their personal tax returns. One LLC can own another LLC -- or several of them -- as a subsidiary. There are upsides and downsides to these arrangements that members should consider.
Parents and Subsidiaries
A stand-alone LLC has no parents or subsidiaries of its own, while a parent LLC has subsidiaries. The purpose of a subsidiary relationship is to protect one business unit from legal or financial problems in another. If the parent unit does not take an active role in the day-to-day operations of the subsidiary, for example, then any claims against the subsidiary should only affect that division of the organization. If a subsidiary turns unprofitable or runs into financial trouble, it can be wound up and disbanded while leaving the parent, and other subsidiaries, unaffected.
Setting up subsidiary LLCs is easier, in terms of regulation and legal filings, than setting up affiliated corporations. A parent LLC also has flexibility and options in operating its business through a subsidiary. The parent can lease equipment, operate manufacturing facilities, buy and sell real estate, loan money, and set up a sales network, all through a subsidiary company. By writing up operating agreements with the subsidiary, the LLC parent also can define the exact nature of the relationship, making it easier to defend itself from any creditor claims against subsidiaries.
A stand-alone LLC benefits from a simpler corporate structure than a parent/subsidiary structure. The single LLC only needs to register once, and renew annually, with the state agency that registers businesses and clears business names. Financial statements and bookkeeping are streamlined, and the simpler structure makes it easier to negotiate with banks for loans, handle insurance needs, file taxes and market the business.
The Series LLC
Some states allow the formation of a series LLC, a single business that functions in the same way as a "holding company." The series LLC sets up separate divisions through changes to the company's operating agreement, not by setting up entirely new LLCs as subsidiaries. A real estate investment firm, for example, may structure a series LLC to handle separate lines of business: apartments, single-family homes and business property. For liability purposes, the assets of one division are protected from claims against another. Not all states recognize this structure, however, and the tax treatment of such a business would be considerably more complex than for a stand-alone LLC.
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