Tax Filing for LLC Subsidiaries

A limited liability company, or LLC, is owned by members, who can be individuals, other business entities or even a combination of both. When another business owns more than 50 percent of an LLC, the LLC is referred to as a subsidiary. The tax filing obligations of LLC subsidiaries are no different than those of non-subsidiary LLCs; the same LLC tax rules govern.

By default, an LLC with only one member is taxed as a sole proprietorship, while those with two or more members are taxed as partnerships. In both cases, pass-through taxation is used, meaning all business profits, losses, deductions and credits are reported on member returns and not on a separate business return. Limited liability company members do, however, have the option of filing an election with the Internal Revenue Service to have the LLC taxed as a C or S corporation.

When an LLC is a subsidiary of a different LLC, the members of the parent LLC pay the tax on the subsidiary's earnings. For example, suppose you're one of four members of an LLC. If you and the other members decide to create a subsidiary LLC, the parent LLC is treated as its sole member. All of the subsidiary's profits and losses pass through to the parent LLC, which means you're responsible for paying the tax on 25 percent of the parent's and subsidiary's combined earnings. As a result, the subsidiary LLC has no tax filing obligations of its own.

Corporations are also eligible to create or acquire LLC subsidiaries. A corporate entity that's taxed as a C corporation – that's an entity that has its own tax filing and payment obligations – is responsible for reporting the LLC subsidiary's earnings along with its own business profits on Form 1120, the corporate tax return. If the corporation isn't the sole member of the LLC, it's only responsible for the tax on a percentage – equal to the percentage of ownership in the LLC – of the subsidiary's earnings. A corporation that's taxed as an S corporation, however, reports the LLC's earnings on its informational return, but, like a partnership, shareholders are ultimately responsible for reporting a portion of the LLC's earnings on their returns. Regardless of whether the parent is a C or S corporation, subsidiary LLCs have no tax filing obligations.

Members can always elect corporate tax treatment for their LLC subsidiaries by filing Form 8832. If this is done, the LLC pays and reports taxes like a C corporation: The subsidiary will file a separate tax return on Form 1120 and is responsible for all tax payments. When the parent is also a corporation and owns at least 80 percent of the LLC subsidiary, the IRS allows the parent to file a consolidated corporate return that combines the parent's and LLC's income on a single return.