A limited liability company is a type of business set up under state law. Although each state has its own set of rules governing the establishment of an LLC, few states have restrictions on LLC requirements related to ownership. Therefore, a member can be an individual or a business, meaning it’s perfectly legal for one LLC to own another LLC, whether it’s a 1% stake in the firm or 100% ownership. Before you learn how to set up an LLC, find out more about LLC ownership and funding.
Can One LLC Fund Another LLC?
“Can an LLC own another LLC?” isn’t the only question to ask about LLC ownership. It’s also important to understand the rules regarding LLC funding. Each LLC is a separate legal entity, so there are two ways for one LLC to fund another. The first is to provide a business loan. Many companies take out business loans when they need funds to launch their new ventures. An LLC may also need a loan to invest in equipment, build credit or expand a physical location.
The LLC issuing the loan should have a representative of the other LLC sign a promissory note detailing the amount of money borrowed, the interest rate on the loan, and when payments are due. Some promissory notes state that the money is to be repaid monthly, while others state that the full amount must be repaid in a lump sum by a specific date.
Another way for one LLC to fund another LLC is by making an equity investment. This involves providing start-up capital in exchange for shares in the company. For example, if an LLC gives $100,000 in capital to another LLC, it might receive 25% of the other LLC’s equity. With equity financing, the LLC that receives the investment doesn’t have to make monthly payments or pay back the money in a lump sum. Instead, the LLC that provided the funding takes a share of its profits. One LLC owning another LLC has several benefits, but the main advantage is that the money doesn’t need to be repaid.
So, can one LLC own another LLC? With equity investing, the answer is yes.
Can an LLC Do Business as Another LLC?
In some cases, an LLC doesn’t want to use its legal name for a business transaction. An LLC may also want to use a different name for marketing purposes. For example, if an LLC manufactures two product lines, it may want to market under those names instead of under the LLC’s formal name.
To conduct business without using its legal name, an LLC can register a doing business a doing business as (DBA) name. The registration requirements vary by state, but once an LLC registers its DBA name, it can conduct business under that name. It can also obtain a federal employer identification number (EIN) and open a bank account under the DBA. Do you need an EIN for your LLC? In most cases, yes.
Although it’s possible for an LLC to register several DBA names, every LLC is a separate entity, so it’s not possible for one LLC to do business under the name of another LLC. The LLC must use its legal name or one of its DBA names. You may also want to look into the differences between a DBA and LLC.
When setting up a new company, many entrepreneurs wonder, “Can an LLC be a member of another LLC?” In most cases, yes. Since many states have no restrictions regarding LLC members, one LLC can be a member of another.
Can an LLC Own Subsidiaries?
Yes, an LLC can own subsidiaries. A subsidiary is an independent company operating under the controlling interest of another company. To have a controlling interest, the other company—known as the parent company—must own more than 50% of the subsidiary.
Forming a subsidiary has several benefits for LLC members. One is that the subsidiary doesn’t have to follow the policies and procedures established by the parent company. Because it operates independently of the parent company, a subsidiary can also build its own brand. Increased brand recognition is helpful for marketing and public relations. Depending on where the parent company and subsidiary are located, there may also be some tax benefits available.
Google is one of the best examples of a subsidiary that operates independently of its parent company. In 2015, Google was restructured, creating a parent company known as Alphabet. Google continues to operate under the Alphabet umbrella, along with YouTube, Niantic, Sidewalk Labs and other brands. Although Alphabet is a corporation, Google is an LLC, demonstrating how subsidiaries can be used to allow LLCs to operate independently.
Is it Better to Have Multiple Businesses Under One LLC?
From an administrative perspective, it’s much easier to operate multiple businesses under once LLC. There’s less paperwork, and you only have to pay one filing fee. Unfortunately, operating multiple businesses under one LLC can be risky, especially when you consider the main advantages and disadvantages of LLCs.
An LLC is a legal business structure that separates a company’s finances from those of its owners. One of the main differences between a sole proprietorship and LLC is that LLC owners can’t be held personally liable for the company’s debts. If a business owner forms two LLCs, the income and assets of one LLC are completely separate from the income and assets of the other LLC.
Operating multiple businesses under one LLC eliminates that separation. If one business has trouble paying its debts, a creditor could force the sale of assets owned by other businesses operated by the same LLC. This leaves those businesses on loose financial footing. Depending on the circumstances, it may be better to form separate LLCs instead of operating multiple businesses under a single LLC.
Protect Your Business
Every state has different requirements for forming an LLC. LegalShield makes it easy to form an LLC online, whether you’re a first-time business owner or an experienced entrepreneur.
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