How Do I Create an LLC Subsidiary? (What You Need to Know)

The subsidiary Limited Liability Company is a popular organizational structure for multi-member LLCs, but creating one isn't as straightforward as you might think.

However, if you take the time to learn about subsidiary LLCs and their advantages and disadvantages, it's easy to see why they're becoming so popular among business owners.

What Is an LLC Subsidiary?

A subsidiary LLC is a separate legal entity formed by one LCC parent company to own another LLC. In other words, a subsidiary company owns a controlling interest in a parent company.

What Are the Advantages?

There are numerous benefits to creating a Limited Liability Company subsidiary:

1. An additional layer of asset protection via liability protection, separating your personal assets from the business ones.
2. Easier management and administration.
3. Separate ownership and assets.
4. Tax benefits.
5. More fundraising opportunities.
6. Increased credibility and visibility.
7. Greater control over company operations.
8. Enhanced branding and marketing potential.
9. Better protection in the event of a lawsuit.
10. Improved overall business efficiency.

What Are the Disadvantages?

There are also some drawbacks to forming a subsidiary, such as:

1. Increased administrative costs and stricter formalities (i.e., increased filing and reporting requirements).
2. A reduced ability to tax-plan (due to more entities for the IRS to consider in their computations).
3. Increased complexity (which can lead to disputes and misunderstandings among the members).
4. Potential for conflicts of interest among the owners.
5. Difficulty in dissolving the subsidiary if things go wrong.

Steps To Create an LLC Subsidiary?

The process of creating a subsidiary LLC is relatively simple, but it's important to follow the correct steps to avoid any legal issues down the road.

Here's a brief overview:

1. Draft and file the Articles of Organization form for the subsidiary LLC with your state's secretary of state. The articles of organization will list the parent company as the owner of the subsidiary.
2. Create an LLC's Operating Agreement, which is a document that allows you to provide additional rules and guidelines for your LLC. Operating agreements should list the names of all members, managers, transfer restrictions, and any provisions related to withdrawal or expulsion from the LLC.
3. If you do not create an LLC Operating Agreement, the default rules in your LLC Articles will govern how decisions are made within your company regarding company debts and other matters.
4. Have the parent LLC execute a Subsidiary Agreement (or similar document) transferring ownership of the subsidiary to the subsidiary LLC).
5. Allocate ownership percentages for each member in the Subsidiary Operating Agreement. You will also need to assign a registered agent to handle any legal documents regarding the subsidiary.
6. Include a buy-sell clause in the Subsidiary Operating Agreement that specifies how the subsidiary's buyout price will be determined. This can be carried out by the registered agent. The operating agreement must also include the management structure.
7. Establish additional formalities, such as holding annual meetings of both LLCs ( the parent company and the subsidiary) and acquiring any additional licenses which would allow the subsidiary to operate under the parent company's licenses.

If you need help creating an LLC subsidiary, you can always consult with an experienced business attorney.

FAQs

Conclusion:

Now that you understand what an LLC subsidiary is and the advantages and disadvantages of creating one, as a business owner, you can make a more informed decision about whether this organizational structure is right for your business.

Remember to seek legal advice from a law firm or an experienced business attorney if you are looking to start a new LLC.