The LLC is often a simple and popular choice to incorporate a business because it involves less formality and regulatory reporting requirements.

Corporation and LLC provide both a protection from personal liability. It is more difficult to seize asset to an LLC then under a corporation. Therefore from a liability point of view LLC are a better choice.

The C-Corporation is the ideal choice if you want to grow a business to potentially attract venture capital, since the C-Corporation structure enables you to issue multiple classes of stock, and venture capital investors often want to receive preferred shares with special rights and benefits.

In deciding what type of entity it should use as a subsidiary, a parent company has two main choices—a state-law business corporation of which it will be the sole shareholder or

a single-member LLC of which it will be the sole member.

From a business organization law viewpoint, single-member LLCs are substantially better than corporations.

1) The liability shield provided by single-member LLC to their members is at least as strong as that provided by corporations to their shareholders.

2) Entities that own single-shareholder corporations must comply with numerous burdensome statutory formalities, and their failure to comply with them can create a risk of veil-piercing. LLCs are subject to only the most minor formalities.

From a tax law viewpoint:

Corporate subsidiaries will be subject to taxation as C corporations, and, in general, their parents must determine their tax liabilities in accordance with U.S. Treasury consolidated return regulations. These regulations are complex and can sometimes yield unwanted results. By contrast, by reason of federal Entity Classification Regulations almost all single-member LLCs owned by entities are classified as “disregarded entities” for federal tax purposes. This means that their tax items are treated as those of their parents, and their parents need not be concerned about the consolidated return regulations. However the parent company will have tax filing obligations in the US which might not be a good option for the parent company.

Third Option: Create an LLC and elects to Corporate C tax Status

In an LLC, Members can always elect corporate tax treatment for their LLC subsidiaries. If this is done, the LLC pays and reports taxes like a C corporation: The subsidiary will file a separate tax return and is responsible for all tax payments. The company will be managed as an LLC.

The key issue that should be also addressed is the subsidiary management structure.

The manager of a subsidiary owned by an entity should never be the parent entity itself, since this will increase the risk that the parent will be sued for activities of the subsidiary.

If the business activities of the subsidiary are relatively limited, the subsidiary should be managed by an individual appointed as manager by the board of directors, managers or other governing persons of the parent. If the business activities of the subsidiary are somewhat complex, the subsidiary should be managed by two or more managers appointed by the parent’s Governing Body.

Last Point to take into consideration, the parent company should hold its assets directly but should conduct its operations through a wholly owned subsidiary entity, and it should lease, lend or license its assets to this subsidiary. Under a properly structured parent/subsidiary structure of this kind, if the subsidiary’s operations give rise to a third-party claim, the parent, if it has not participated in the subsidiary’s operations, should not be subject to the claim and its assets should not be at risk for the claim.



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