My friend and I are planning to create our own LLC company. But we came across the idea of having one parent LLC wholly owning and governing multiple subsidiary LLCs. Initially, we want to create two LLCs -- a parent and one subsidiary. The subsidiary will be the money-maker, and the parent LLC is the holding company. When the money rolls in, we want to create additional subsidiaries under the parent. Our questions are: -- How are LLC subsidiaries funded? -- Can profits from the first subsidiary fund newer subsidiaries? -- If yes, can subsidiaries fund other subsidiaries without limit? -- Or, can subsidiaries only fund other subsidiaries during formation? -- Am I correct to assume any funds from subsidiaries will have to first filter thru the parent?
In a very general repsonse, the holding company at the top will generally fund the new LLC's. The profits and cash generated in the subs should flow up to make those monies available to the holding company for funding new ventures. However, the complexity of the organizational structure you're contemplating requires far more technical advice than can be practically given in a newsgroup. There are many factors that you have not even hinted at in your question that drive the decision as to the optimal choice of entity and operating structure. You need to work with an experienced CPA and/or business attorney to set up this structure so that it meets both your current and your reasonably projected future needs.
Why do you want to set up such a complicated organization? The KISS method (keep it simple, stupid) generally works best, especially for small businesses. Generally businesses are funded by (a) their owners' capital contributions, (b) borrowing from the owners or from third parties, and (c) net income that is reinvested and not paid out to the owners. You certainly can set up chains of LLCs, or a parent LLC that is a member (perhaps the only member) of any number of lower-tier LLCs. Assuming none of these LLCs elect to be taxed as corporations, all of the net income of all of them will flow (for income tax purposes) to the parent LLC (and their other members, if any) and from the parent LLC to its members. The lower tier LLCs may distribute all or part of their net income up to the parent, and the parent may distribute those funds to its members, or reinvest them in other "subsidiary" LLCs. If your concern is to isolate liability exposure to the owners of certain parts of the entire business enterprise, you may want to look into the "series" LLC statutes that are available in Delaware and a few other states. The series concept allows for the creation of separate LLC interests with respect to certain specified LLC properties or activities, within what is essentially a single LLC. Katie in San Diego
"If your concern is to isolate liability exposure to the owners of certain parts of the entire business enterprise, you may want to look into the "series" LLC statutes that are available in Delaware and a few other states. The series concept allows for the creation of separate LLC interests with respect to certain specified LLC properties or activities, within what is essentially a single LLC." Keep in mind, however, that, particularly with the wholly-owned subsidiary LLCs, the corporate formalities must be scrupulously complied with; otherwise, you run the risk of having the corporate veil pierced. Second, a parent-subsidiary LLC structure may protect the subsidiary LLCs from the liabilities of another sister subsidiary LLC, but may not provide much protection from the parent's liabilities - since the parent controls the subsidiary, if a creditor can gain control of the parent it will almost ipso facto control the subsidiaries. The primary question to answer is why you want to operate with more than one entity. Each entity you set up will come with its own state filing requirements and state tax costs (usually, a minimum franchise tax of $100 to $150 per year). One or more of the LLCs may also be required to file to qualify to do business in one or more states and, depending on the activities (actual or imputed) of the parent LLC, the parent LLC may also be required to file to qualify to do business. Each such filing requirement carries its own filing fee and, in some states, e.g., NY, has a publication requirement that can be somewhat onerous and quite expensive (at least $2,000 for each LLC required to file an application to qualify to do business). Each will also require the drafting of a separate operating agreement, which must be made consistent with the operating agreements of the other LLCs within the group. You also have to keep track of multiple minute books and of who is acting in what capacity with respect to each LLC (think of the old Abbot & Costello routine - Who's on First?).
I definitely agree with Shyster here. Whether you set up multiple LLCs or use the series LLC concept, you're getting into a very complicated situation with significant administrative and compliance costs involved. The series LLC sounds like a great idea, but there are a lot of unresolved tax issues on both federal and state levels. The simpler, the better, unless there are really good legal reasons for creating multiple entities. Katie in San Diego
Your decision to use multiple LLC's could be a very good idea; especially if you are investing in real estate, or businesses which could incur significant liability. In a typical scenario you would prepare 1065 (partnership returns) for each of the subsidiary LLC with the income going to the parent LLC. the parent LLC would then prepare a
1065 to you and your partner. piece of cake...
Jerry Doblie
14045 Sunnyside Ave N Seattle, WA 98133
206-365-0143
As has been pointed out earlier, it could be a very good idea or a waste of time and money, all depending on what you're going to be using the LLCs for. For example, if you expect to develop a portfolio of real estate investments, e.g., 5 small apartment buildings, then it probably would be useful to have a parent holding LLC with each building owned by a subsidiary LLC in which the parent is the sole member. Provided (and this is always the biggest trouble investors end up having) that the corporate formalities are abided by, and the separate legal existence of each entity respected, for non-tax purposes each building investment should be insulated from the liabilities that might arise from any of the other buildings; e.g., if a tenant in building 1 wins a major slip/trip/fall suit, the tenant could force the sale of building 1 to satisfy the judgment, but would probably not be able to reach any of the other buildings. For tax purposes, the subsidiary LLCs would most likely be disregarded (unless an election to be treated as a corporation was made) and the parent would be treated as the owner of all of the buildings and of all of the items of income and expense associated with the buildings. There would therefore only need to be one partnership return and one set of K-1s prepared - those required for the parent LLC. At bottom, it all depends on what you're going to be doing, what assets you'll be owning, if any, and what liabilities (tax and non-tax) you're likely to face. Before you decide on what type of structure to choose, you should sit down with an accountant who has both business and tax experience in the area you'll be focusing on to get some real advice (what you get here doesn't count) based on all of the relevant facts. Also, don't forget to take into consideration the estate planning opportunities and issues that may arise; LLCs and partnerships can be used to minimize estate taxes, but the planning is much more defensible if it was set up long before death than if it was set up 2 weeks before.
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