Can an LLC Own an S-Corp?Everything You Need to Know
What is an LLC?
A Limited Liability Company or LLC is a type of business entity legally created to conduct business and generate profit.
It is widely known for its limited liability protection towards its owner and acts as a pass-through of the business’ generated income to its members.
The owner of LLCs can be an individual, a business entity, another LLC, or foreign corporate entities.
LLC owners are otherwise known as members, and there are no limits as to how many can be members of an LLC even though single-member LLCs are now allowed.
What is an S-Corp?
S Corporations or S-Corps is a corporate entity whose function is to pass on the generated income from business operations to its members as well as the corporate deductions, losses, and credits.
It will be the member’s obligation to report all the passed-on amounts on their tax returns.
The tax rates to follow are the corresponding individual tax rates imposed by the regulatory bodies.
This practice prohibits the same income from double taxation.
One of the eligibility requirements to qualify as an S-Corp is having allowable shareholders (individuals and qualified estates and trusts).
What prompts the disqualification of the S-Corp status is when shareholders are Partnerships, Corporations, and non-resident aliens.
Can an LLC Own an S-Corp?
The IRS provision clearly states that only individuals and certain estates and trusts are qualified as S-Corps shareholders.
Therefore, an LLC is a corporate entity prohibited by law from acquiring an S-Corp.
This rule shall apply unless and until the provision is lifted by the regulatory bodies.
However, there are ways for an LLC to become an S-Corp shareholder.
The LLC must be a single member categorized as a disregarded entity to be granted the privilege to acquire shares with the S-Corp.
But in general, LLCs being classified as corporate entities are prohibited to own a share in an S-Corp and are not allowed to file their returns federally as a corporation.
Unraveling the Madness Behind the IRS’s Method
The main reason why the IRS upholds strict guidelines in granting an S-Corp status is to give encouragement to American businesses and allow them to compete in the market by giving them tax breaks.
The requirements can prove to be a hassle to small companies and their owners but for a good reason.
Essentially, S-Corps are merely pass-through entities wherein income passes directly to the owners as personal income.
Due to this, shareholders of S-Corps should not be foreign nationals because it defeats the purpose.
When an LLC with multiple members wishes to own an S-Corp, the categorization as a Subchapter S election will be automatically extinguished, and will only become a regular C corporation.
This subjects the business to business taxes.
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Iowa State University "Single-Member LLC Can Be S Corporation Shareholder" Page 1 . November 2, 2022
Internal Revenue Service "S Corporations" Page 1 . November 2, 2022