Many small business owners reach a point where they want more flexibility. Maybe you’re running an S corporation, but now want to separate real estate or new ventures. Or maybe you have an LLC and wonder if it could fit into your current S Corp setup. That’s where this question, “Can an S corp own an LLC?” comes in.
Yes, an S Corp can own an LLC, but the right setup can decide how much you pay in taxes, how well you protect your personal assets, and how smoothly your company grows.
In this blog, we will break down the details, covering how it works, the tax side, benefits, restrictions, and real-life reasons why businesses use this structure so you can decide if it’s the right fit for you.
Understanding S Corporations and LLCs
An S corporation (S corp) is not a business type by itself. It’s actually an S-Corp tax election with the IRS. That means you first create a corporation or an LLC, and then you file paperwork to be taxed under S corporation rules. Businesses do this mainly to avoid double taxation and to save money on self-employment taxes.
For example, if you run a business as a sole proprietor, every dollar of profit is subject to self-employment tax. But in an S corp, you can split your income into a salary (which pays payroll tax) and distributions (which don’t). This often saves owners thousands of dollars.
On the other side, an LLC (Limited Liability Company) is a flexible legal entity. It’s popular because:
- It’s easy to form.
- It protects your personal assets from business debt.
- It can choose how to be taxed (sole proprietorship, partnership, C corp, or even S corp).
So, while the S corp is mainly a tax choice, the LLC is a legal shell that can hold property, run operations, or even be owned by another entity. And this is where the big question arises: can an S corporation own an LLC?
Explore: C Corporation vs S Corporation: Understanding the Differences, Tax Implications & Benefits
Can an S Corp Legally Own an LLC?
Yes, an S corp can own an LLC.
This surprises a lot of people. You may think S corporations can only be owned by individuals. That’s true for shareholders of the S corp itself, but when it comes to an S corp owning an LLC, the IRS does allow it.
Here are the main setups:
- S Corp owning a single-member LLC
- In this case, the IRS ignores the LLC for tax purposes. The LLC’s income and expenses flow straight onto the S corp’s tax return.
- Example: If you own an S corp that runs a marketing agency. You set up an LLC to own the office building your agency operates in. For tax purposes, the IRS sees both as one company, but legally, the LLC shields the building from your S corp’s business debts.
- S Corp owning a multi-member LLC
- Here, things get more complex. The LLC is taxed as a partnership unless it chooses otherwise. The S corp is treated as one of the members, which means income passes through to the S corporation and then to its shareholders.
- Example: Your S Corp partners with your brother’s LLC to launch a side business. Your shared LLC is taxed as a partnership, but your S corporation only reports its share of income.
- An S corporation owning an LLC taxed as a corporation
- An LLC can elect to be taxed like a C corporation. If an S corporation owns that kind of LLC, the LLC files its own return and pays corporate tax. This sometimes leads to double taxation, which most small businesses avoid.
So, yes, an S corp can own an LLC. But the way it works depends on how that LLC is taxed.
Read: When Does an S Corp Need to File Form 8990?
Tax Implications of an S Corp Owning an LLC
This is where things really matter. Taxes can either make your setup smart or painful.
The general rule is that income passes through to the S corporation. That’s the benefit of owning an LLC. The S corporation then distributes profits to shareholders, who report them on their personal tax returns. This keeps things streamlined.
But the details differ depending on the LLC’s setup:
- Single-member LLC owned by an S corp
- The IRS treats it as invisible for tax purposes. The LLC’s books fold into the S corp’s tax return.
- This avoids the hassle of filing a separate return for the LLC.
- Multi-member LLC
- The LLC files Form 1065 (partnership return). The S corporation gets a K-1 for its share of income.
- That income then flows to S corp shareholders.
- Example: If the LLC makes $100,000 profit and the S corp owns 60%, then $60,000 flows to the S corp and eventually to its owners.
- LLC taxed as a corporation: Here, the LLC files its own corporate return and pays its own taxes. If it’s taxed as a C corp, dividends sent to the S corp can cause double taxation.
This is why tax planning matters. Setting things up without advice can lead to unexpected bills. A lot of owners check with our Austin CPA Firm to make sure their structure saves money instead of costing more.
One key phrase here is pass-through taxation S corp LLC. This is the backbone of why many owners choose this setup. Income passes through the LLC, then through the S corp, and finally reaches the shareholders without getting taxed twice at the entity level.
If you want to know whether your situation fits, use an S Corp tax calculator.
Benefits of an S Corp Owning an LLC
Here are the benefits of going through the effort of setting up this structure at all. Let’s break it down:
- Easier management: One S Corp can have several LLCs, each for a different line of business.
- Stronger protection: If one LLC faces a lawsuit or loses money, other LLCs (and the S corp as a whole) are safe. This is big news for businesses with different brands or high-risk projects.
- Simple reporting: You only need to file one federal return for the S corporation, even if it owns many LLCs (unless the LLCs are set up as corporations for tax).
- Better planning and growth: It’s easier to buy and sell parts of your business, take on new partners, and move assets around.
- Cleaner bookkeeping: Keep your money and risks in separate “buckets” using business entity structures.
All these benefits make the S corp and LLC combo a go-to move for many business owners in fields as wide as real estate, tech, food, and personal finance.
Limitations and Restrictions You Should Know
While an S corp owning an LLC comes with many advantages, it isn’t always smooth sailing. There are clear restrictions that you need to be aware of. If ignored, they can cost you your S corporation status or even bring IRS penalties.
Here are the key ones:
IRS restrictions and state rules:
- IRS restrictions on S corp ownership: Only people, certain estates, and some trusts can own shares of an S corp; never partnerships, corporations, or regular LLCs. Make a mistake here, and you lose S corporation status.
- Legal restrictions S corp LLC: State rules can also limit this setup. Always check with your CPA or a lawyer in your state.
- If your S corp owns an LLC and wants to add more owners, those owners must qualify under S corporation rules.
- Annual paperwork and fees: Each LLC and the S corporation must keep filings and fees up to date.
Watch for tax surprises:
- Some states charge fees for every LLC you set up, even if all are owned by one S corporation.
- Not all incomes are “pass-through.” There might be exceptions for rental income or assets.
It’s best to work with a pro. Look for a CPA for business tax preparation to help you before making changes.
When Does It Make Sense for an S Corp to Own an LLC?
This setup doesn’t work for everyone. But for certain business owners, it can be very smart.
- Asset protection: If your S corp runs a restaurant, and you want to protect the building. You put the property into an LLC owned by the S corporation. If a lawsuit hits the restaurant, the building has a separate shield.
- Separating ventures: Many owners use their S corporation for their main operations but create LLCs for side businesses. For instance, a doctor with an S corporation for their medical practice may form an LLC to own a rental property.
- Scaling up: If you want to expand into multiple businesses under one umbrella, an S corp owning multiple LLCs can help. Each LLC has its own bank account and liability protection, but still flows into the parent S corporation for taxes.
- Brand flexibility: If you want to test a new product line under a new brand name, you can put it in an LLC owned by your S corporation. If it succeeds, great. If it fails, it won’t directly harm your main business reputation.
When thinking about whether owning an LLC as an S Corp is right for you, ask, “Am I trying to protect assets, separate ventures, or grow under one tax roof?” If yes, it may make sense.
If you’re still unsure what to do, book a consultation and let us help you for peace of mind on setup, paperwork, and compliance.
Alternatives to S Corp Ownership of an LLC
If this structure doesn’t fit your situation, let’s explore alternatives:
- S Corp vs LLC structure: Some business owners stick to just one. They either run everything under the S Corp or everything under the LLC. Simple, but less flexible.
- C corporation option: Some businesses choose a C corporation instead. C corps can have unlimited shareholders and allow foreign investors. They’re also better for raising venture capital. But C Corps get Form 1099 when they do face double taxation on income and dividends.
- Partnerships: If you and another owner want a flexible setup, you can form an LLC taxed as a partnership. This avoids S corp limits but doesn’t offer payroll tax savings.
- Parent C corp: Instead of an S corp at the top, some businesses use a C corp parent company. Then they create LLCs underneath. A C Corp can also own an S corp, but the S corp would lose its status immediately since a C corp is not an eligible shareholder.
The right choice depends on your growth goals, tax planning, and who your owners are.
Hopkins CPA Firm Helps You Plan Right
So, it’s legal, smart, and common for an S corp to own an LLC. But the results depend on planning, good advice, and following the rules.
If you’re unsure which road to take, Hopkins CPA Firm can help you and is the best choice when it comes to structuring S corps and LLCs. We analyze your business goals, design the right entity structure, help with payroll planning, set up S Corp subsidiary LLCs, and handle complex IRS requirements that confuse most business owners.
Contact us today and let us show you how to make the most of your structure and your taxes.
FAQs
Yes. This is called an S corp owning a single-member LLC. The IRS treats the LLC as part of the S corporation. The income and expenses are reported directly on the S corporation’s tax return.
Yes. Many businesses do this. This is often called an S corporation owning multiple LLCs. Each LLC can handle different business lines or assets, while taxes still flow to the S corporation.
The income passes through to the S corporation. Then the S corporation distributes it to shareholders, who report it on their personal returns. The exact tax treatment depends on how the LLC elected to be taxed.
No. The law does not allow one S corporation to be a shareholder in another S corporation. This rule is part of the S corporation ownership rules that protect the structure.
Owners do this for asset protection, tax planning, and growth flexibility. It also helps keep businesses separate under one umbrella.
Yes. The members of the LLC must not create conflicts with S corporation rules. For example, foreign investors cannot be part of the ownership chain. This ties back to legal restrictions of S Corp LLC.
