When you set up your small business as a limited liability company, you benefit from additional flexibility in managing your business matters. You can use an LLC to set up, acquire or manage interrelated business entities to broaden your presence in the marketplace or reduce your overall liability across all of your business affairs. While an LLC has the legal authority to invest in or entirely own another company, competing factors may complicate the transaction.
Every state gives a properly formed LLC the power to operate as an independent legal entity that is separate from its owners. The company is authorized under the law to do many of the same things that a person can do, including buying and selling property, holding property in its own name, suing and being sued, borrowing and lending money, and investing profits for gain. Upon the agreement of the company's ownership, an LLC can set up a subsidiary company or buy the rights to another company, provided there are no legal obstacles that prohibit the relationship between the LLC and the target company.
Using an LLC to buy the rights to another company typically involves purchasing the whole business in its entirety. Generally, the LLC would step into the shoes of the prior owner so the business can keep operating uninterrupted; however, if the business you want to buy is a sole proprietorship or partnership, your LLC can't simply buy the business as a single entity. These types of unincorporated businesses operate as alter egos of their owners and don't exist as separate legal entities. The only way to buy a business structured as a sole proprietorship or partnership is to complete an asset sale, where your LLC would purchase an agreed-upon list of business assets. The LLC could then re-form the business under its own authority.
Closely Held Companies
While an LLC can technically purchase 100 percent of the ownership interest in any business that operates as an independent legal entity, such as a corporation or another LLC, small companies typically use ownership transfer restrictions to prevent outsiders from buying in. These types of restrictions usually affect transfers of partial interests in the company, but it's not uncommon to run across a closely held company with restrictions on the sale of the entire company. For example, a family-owned corporation may have restrictions in its bylaws that prohibit the sale of the company to anyone outside of the family.
Ordinarily, an LLC can buy the rights to a corporation by purchasing 100 percent of its stock; however, if the corporation has made a Subchapter S election under the federal tax code, an LLC can't buy the S corporation without the company losing its special tax status. If an LLC buys an S corporation, the corporation automatically changes back to a regular corporation without special tax privileges, which may affect its value.
- Uniform Law Commission: Revised Uniform Limited Liability Company Act (2006)
- Digital Media Law Project: Limited Liability Company
- Inc.: Buying a Business or Its Assets
- Usman Law Group: The Significance of Share Transfer Restrictions for Closely Held Corporations
- Entrepreneur: Business Structure Basics
- Digital Media Law Project: S Corporation
Terry Masters has been writing for law firms, corporations and nonprofit organizations since 1995. Her online articles specialize in legal, business and finance topics. She holds a Juris Doctor and a Bachelor of Science in business administration with a minor in finance.