Should a Multi-Member LLC Own a Single-Member LLC

 

Is your multi-member LLC considering the purchase of another business such as a single-member LLC mulch wholesaler; or are you interested in launching a LLC subsidiary for monitoring individual performance of a new product or service?

 

It is not uncommon for a multi-member LLC to own a single-member LLC subsidiary. Today, proper business structuring is vital to minimizing liability in a lawsuit, or preparing for the harvesting of value from a business segment, or perhaps for individual management purposes. For instance a business enterprise may hold $3m worth of operating equipment in a holding company LLC and conduct window-front sales as a single-member LLC. The subsidiary LLC performs the marketing, sales, and service. This type of structuring is a first step toward minimizing liability to the equipment assets in the event of a lawsuit against the subsidiary from a customer or client. Proper entity structuring is not a linear conversation, and varies from business to business. These conversations should be conferenced with both a business attorney and CPA.

 

Single-member LLC’s are “disregarded entities” for the most part unless taxed as a corporation. The “disregarded entity” terminology is to say that these entities do not file their own federal tax return. They are consolidated into the parent member activities for federal taxation; and therefore disregarded for individual federal tax reporting. In the instance of corporate taxation of a single-member LLC, the complex tax rules can sometimes result in minimal compliance and tax benefits. Corporate taxation would most often not be advised for a single-member LLC because of the reporting and compliance factors required for corporations. Although a few instances prosper a single-member LLC taxed as a say an S-Corporation. How? You can pay yourself W-2 wages and qualify for a domestic production activities deduction, and/or lower Medicare tax on higher revenues. Talk to your CPA for tax calibration.

 

Multi-state filings are more complex in single-member LLC. For instance, 555 LLC, a Delaware single-member LLC performing business activity in Pennsylvania would need to file a RCT-101 and provide a proforma federal form 1065 with required schedules for multi-state tax compliance. The 555 LLC parent member, say 655 LLC, a multi-member LLC, would need to file a PA-20S/PA-65 partnership information return in Pennsylvania because the consolidated activity of 555 LLC, creates a multi-state filing requirement for parent 655 LLC, for federal purposes. While your CPA will keep your business activities in compliance with tax regulations, it’s important to understand that additional tax reporting can be required with the complexity of your business structure and activities.

 

If your advisors agree that multi-entity structuring makes tax and legal sense for your business, you must also have appropriately crafted intercompany agreements. These intercompany agreements provide written acknowledge of the agreements for inventory, leases, licenses, and collateral agreements, etc. The agreements should always be at arm’s length. Have an attorney draft these intercompany agreements to safeguard your business in harsh environments.

 

Summary: In some instances it makes sense to have multi-entity, inter-connected ownership in business structures. Talk with your CPA and attorney to optimize business structure for your enterprises, if you think it may be conducive for legal or management purposes.