Many small business owners dream of growing their operation. If you’re one of them, whether you’re an LLC or not, do you know which business entities your business can own?
CSI Accounting & Payroll has worked with small business owners for over 50 years. When owners find growth with the help of our services, they often want to know how they can acquire another business. We’re happy to help address these common questions about parent and child companies:
- Can an LLC own another LLC?
- Which business entities can own other business entities?
- Am I the right business entity type, or do I need to change?
LLCs Owning Other LLCs
In the United States, any business can become an LLC. “LLC” stands for “Limited Liability Company” and is not a type of corporation or business entity at all; it is a legal formation. This is where a lot of confusion lies.
An analogy that our accounting department manager likes to use is, “An LLC is an umbrella.” An LLC itself is not a taxable entity, but you can be one of four buckets underneath it:
- Sole proprietorship
- Partnership
- S-Corp
- C-Corp
LLCs have nothing to do with the IRS or how the IRS will allow your business to purchase another business. An LLC can own another LLC or other types of business entities. This is known as a parent-child or parent-subsidiary relationship. This relationship is used for:
- Segregating business activities and assets
- Limiting liability
- Managing taxation
Parent and Child Business Entities
Which Businesses Can Sole Proprietorships Own?
Sole proprietorships are owned and operated by one person, and it’s not legally separate from the owner.
Because of this, sole proprietorships cannot own other business entities. However, an owner of a sole proprietorship can still be the sole operator of multiple business ventures under the same sole proprietorship entity.
A sole proprietor can, however, own an LLC. Even though the same individual owns both, they are considered separate legal entities. This helps the owner limit their personal liability.
Which Businesses Can Partnerships Own?
Partnerships have two or more individuals or entities as owners. Generally, partnerships can own almost all other business entities and LLCs. The exception is owning S-Corps, which cannot be done by the Partnership entity but can only be done by individuals.
Which Businesses Can S-Corporations Own?
Most of CSI Accounting & Payroll’s clients are S-Corps. A simple way to think about an S-Corp is to remember “SMALL-Corp.” In order to be an S-Corp, you need to have less than 100 shareholders, all shareholders must be U.S. citizens, and you cannot be publicly traded on the stock exchange.
An S-Corp can own any other type of entity and LLCs. Plus, when a parent S-Corp acquires ownership of another S-Corp by buying 100 percent of its shares, the child can become a qualified Subchapter S subsidiary (Q-Sub). This can offer some tax benefits.
Which Businesses Can C-Corporations Own?
A C-Corp has different taxation and ownership rules than an S-Corp. C-Corps - or “Common Corporations” - have no limit on shareholders, can include non-U.S. citizen and entity shareholders, and can be publicly traded on the stock exchange.
C-Corps can own almost all other business entities and LLCs by acquiring their shares or membership interests. The exception is owning S-Corps, which cannot be done by the C-Corp but can only be done by individuals.
Find the Right Entity for Your Business
You should always make sure your entity structure is the best match for your goals, tax considerations, and liability.
Analyzing your current entity type and considering a change are both critical pieces of going over your business’s tax return. Do you know why your business is that structure? It's important to know the different types of business entities and the benefits they offer.
Have you considered if a different structure could fit your company better? This is something that should be discussed with your accountant. When was the last time your current accountant reviewed your options with you?
At CSI, we will always take a fresh look at your business entity type right when you come on board, once each year, and when there is a large change in your business, such as:
- You have a new business line.
- You acquired a new business.
- You sold part of your business.
- You brought on a new investor.
Get the Most Out of Your Business Entity With a Monthly Accountant
If you’re dreaming of acquiring a business, we hope this helped answer some of your questions about which business entities and LLCs you can own - as well as whether or not you should change your current entity structure.
Wondering if you should speak with an accountant? Why not give monthly accounting a try? At CSI Accounting & Payroll, we answer your one-off questions as often as you can ask them, and we even provide an add-on consulting service for larger projects.
To see if we can be a good fit for your business, click the button below for your free consultation:
Not ready to talk? That’s okay! First, learn more about how an accountant can help you buy a business.
