Creating a subsidiary LLC is a relatively straightforward process that involves:
Your business is growing and you’re thinking about an expansion. Should you create another business? Create a new division of your existing one? How about creating a subsidiary LLC?
This last option offers several benefits, such as liability protection, greater tax flexibility, and increased privacy.
Once you decide to create a subsidiary LLC, the next question becomes what that process entails. The answer depends on whether you already have an LLC and in which state you want to create the subsidiary company. That said, the overall process is similar to creating a regular limited liability company, with a few small differences, which we discuss below.
A subsidiary is a company that is owned and controlled by another company. The company that owns the subsidiary is called the parent company. If a company has 100% of its stock owned by another entity, it’s known as a wholly owned subsidiary.
As for what it means to be an LLC, it’s a type of limited liability company that offers several benefits for its owners:
Before you dive into the paperwork, the most critical first step is to consult with an attorney and a CPA. While creating a subsidiary is a common way to expand, it isn't the right fit for every situation.
Certain tax classifications or specific business structures may not allow for subsidiaries, or they could trigger unexpected tax implications that outweigh the benefits. A professional can help you determine if this move aligns with your long-term goals.
If you have questions about whether this structure is right for you, LegalShield can help. Our Business Plans provide access to provider lawyers who can offer guidance on your specific business structure and help you decide if a subsidiary is the right path forward.
Once you’ve cleared the legal and tax hurdles with your advisors, you can pick a name for the subsidiary company. This assumes that you already have a limited liability company that will be the parent LLC. You’ll also need to make sure the parent LLC’s ownership has approved the creation of the subsidiary.
When choosing a name, you’ll need to follow state requirements, which typically include:
If you’ve chosen a name but aren't sure if it’s available, you can search for it on the Secretary of State website.
What you need to do to complete your articles of organization will depend on your state’s filing requirements. That said, you should expect to include the following information about your subsidiary:
This is the first major step beyond creating an individually owned LLC. Because LLCs are allowed to own other LLCs, you will list the parent company as a member/owner of the subsidiary.
You can also list other individuals or companies as members of the subsidiary. If you do this, the parent LLC must have a majority ownership interest in the subsidiary.
Of all the documents required to create an LLC, an operating agreement isn’t one of them. It’s still a good idea to do so as it can explain the relationship between the parent LLC and the subsidiary.
An operating agreement is also helpful in explaining how the subsidiary should be managed and operated. It can also outline who’s responsible for any debts of the LLC or entitled to any of its profits. LegalShield’s provider lawyers can answer any questions you might have about operating agreements.
Several advantages come with creating a subsidiary LLC, including:
Several potential trade-offs come with creating a subsidiary LLC:
A holding company LLC exists to own and control one or more subsidiaries. There are several benefits that come with creating a holding company:
Subsidiary LLCs aren’t always the best choice for growing a business. Depending on business needs, other alternatives might make more sense. This might apply if a business needs a presence in many different states, for example. In addition to a subsidiary LLC, other options are series LLCs, DBAs, joint ventures, and creating a new division.
Because every business is unique, you may want to speak with a professional to weigh these options. A LegalShield provider lawyer can help you navigate these alternatives to find the structure that best supports your expansion goals.
A series LLC involves a single LLC, and instead of subsidiaries, there are “divisions.” Each division has its own finances, assets, and liabilities. States that allow for series LLCs have their own rules about how series LLCs must operate.
A series LLC can offer asset and liability protection without the hassle (and expense) of creating individual subsidiaries. This might be worth considering if your business wants to create a subsidiary LLC in as many states as possible. Not all states have a series LLC available, and those that do have different laws and requirements.
DBA stands for “doing business as” and allows businesses to operate with a registered name that’s different from their legal name. DBAs make it easy for a single legal entity to establish different brands for different activities. Yet the business can maintain a single legal entity for the business.
DBAs and LLCs have several differences. Basically, a DBA is just an exclusive “nickname” for a business that the business registers with the county and/or state. You might consider a DBA instead of an LLC if your primary goal is to simply create a different brand for your business.
Imagine you want to expand your business into a new area, but you’re afraid your business lacks the resources for this type of growth. A great option in this case might be a joint venture.
A joint venture is an arrangement between two or more businesses in which they work together to achieve a common goal. This relationship usually involves combining the money and expertise of the businesses, while also allowing them to share in the risks and profits.
A joint venture might be a better option than a subsidiary if a business needs outside financial and/or know-how to expand. But this comes with the cost of not having the liability protection of a subsidiary. A joint venture also requires sharing control and profits with another business.
Creating a new division means you simply “carve out” a separate area of the business for a particular task or goal. The business can create this division any way it wants. It can be as informal as taping a piece of paper to a door, or as formal as building a new office with separate management and staff.
The biggest benefit of creating a division is that it is done internally. There’s also the advantage of existing management having direct control over the division. The biggest risk is that the existing business is fully responsible for any financial or legal liabilities of the new division.
If you’re trying to add a department or business section where full control over this new area is important (and you’re trying to keep costs down), creating a new division might be something to consider.
A primary reason for creating a subsidiary is for liability protection. But to keep this benefit, the parent and subsidiary LLCs must operate as separate legal entities. This means:
Once you’ve decided to create a subsidiary LLC, you might need help with running other parts of your business. LegalShield provides members with support for essential tasks like contract reviews, navigating employment issues, and ensuring your operating agreements meet all state-specific legal standards.
Whatever your business’s legal needs, LegalShield can provide guidance. You can choose from several Business Plans to get advice on the legal issues that matter most to you.
You can create as many subsidiary LLCs as you want under the parent LLC. The primary limitation will be the time and money you have available for keeping up with the filing and fee requirements for each business.
It depends on the type of subsidiary, but the cost will be comparable to creating the initial LLC. This cost varies by state based on their filing fees.,
The double LLC approach involves two LLCs. One LLC is the holding company and the other is the operating company. The holding company (parent LLC) owns and manages the operating company (subsidiary LLC).
The goal is for the operating LLC to handle the day-to-day operations of the business. Then the holding LLC can handle the ownership, and management duties.
Yes, each parent and subsidiary LLC needs its own employer identification number (EIN). After its creation, the subsidiary LLC can apply for a new EIN from the IRS.
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