A holding company is a corporation that owns shares in another company. It’s typically positioned between the operating company and the individual shareholder, and it owns the operating company’s voting stock and assets, and controls its management and policies.
Holding companies don’t usually produce goods or services themselves, but rather do so through their operating subsidiaries.
If you are wondering if your S-corporation can own an LLC, the answer is Yes. The owners of an LLC, called members, can be either individuals or legal entities, such as S-corporations, C-corporations, trusts, and even other LLCs.
One of the ways in which an S-corporation can own an LLC is as a holding company. But, why choose to act as a holding company and what are the benefits of doing so? Read further to find out.
An S-corporation is a tax classification, not a formal business structure. This means that other legal entities like an LLC or a corporation can be taxed as S-corporations if they choose to do so.
The requirements to become an S-corporation are:
The main benefit of classifying your LLC as an S-corporation is that it allows you to avoid paying self-employment taxes by paying yourself a small salary from the LLC as well as normal distributions.
Members of an LLC are technically not employees, but rather owners, so they do not get paid a salary. Instead, members are paid in distributions, which are subject to both employment tax and income tax.
An S-corp mitigates the effect of this employment tax by allowing that tax to only be applied to money paid out by salary. This way, some of your profits are paid out through salary, which is subject to both employment tax and income tax, but the rest of your profits are paid out through a distribution, which is now only subject to income tax.
When balanced properly, an S-corp classification can save members from unnecessary taxes.
Despite all of the tax benefits of classifying your LLC as an S-corp, it also comes with many legal formalities. This includes required annual meetings, fund separation and more that many small business owners don’t want to deal with. For this reason, many small business owners choose to operate as a single-member LLC rather than an S-corp.
However, there is a solution to this problem. By forming an LLC under state law, then choosing to have it taxed as an S-corporation for federal income tax, it is possible to get the benefits of both an S-corp and a single-member LLC. This maintains simplicity of operation while also offering a multitude of tax benefits to the LLC’s members.