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.
To help you take the right steps, I teamed up with our legal consultants with more than 10 years of experience in the sector to help you learn about the procedure.
We've done extensive study and provided our own experiences as legal consultants and attorneys and here is a step-by-step guide on how to create an LLC subsidiary.
Quick Summary
- To create an LLC Subsidiary you must first provide authorization and make a final decision on a business structure.
- Before you fund the subsidiary you need to organize and form the business.
- According to the U.S. Small Business Administration, around 15% of LLCs function as subsidiaries, underscoring their strategic and liability benefits.
- We advise hiring professionals if you want to turn a small company into a subsidiary so they can help you navigate the procedure.
How to Create a Subsidiary?
Drawing from our legal experience, the process of creating a subsidiary LLC is relatively simple, but it's important to follow these correct steps to avoid any legal issues down the road.
Here's a brief overview:
- Draft and file the Articles of Organization form for the subsidiary LLC with your state's secretary of state. For our company, the articles of organization listed the parent company as the owner of the subsidiary.
- Create an LLC's Operating Agreement, which is a document that allows you to provide additional rules and guidelines for your LLC such as transfer restrictions and any provisions related to LLC withdrawal.
- 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.
- Have the parent LLC execute a Subsidiary Agreement (or similar legal documents) transferring ownership of the subsidiary to the subsidiary LLC) [1].
- Allocate ownership percentages for each member in the Subsidiary Operating Agreement. In our case, we also assigned a registered agent to handle any legal documents regarding the subsidiary.
- Include a buy-sell clause in the Subsidiary Operating Agreement that specifies how the subsidiary's buyout price will be determined.
- Establish additional formalities, such as holding annual meetings of both LLCs (the parent company and the subsidiary) and acquiring any additional licenses that would allow the subsidiary to operate under the parent company's licenses [2]. According to the National Association of Secretaries of State, nearly 30% of multi-entity LLCs adhere to these practices to ensure regulatory compliance and operational efficiency.
If you need help creating an LLC subsidiary, we recommend consulting with an experienced business attorney.
What Is an LLC Subsidiary?
A subsidiary LLC is a separate legal entity formed by one LLC parent company to own another LLC.
In this business structure, the parent LLC (the majority owner) holds ownership or membership interest in the subsidiary LLC, effectively making the subsidiary a subsidiary of the parent company.
According to the U.S. Small Business Administration, about 15% of LLCs operate as subsidiaries under a parent company structure, highlighting its use for strategic business expansion and liability management.
The primary purpose of creating an LLC subsidiary is to separate and compartmentalize business activities, assets, or liabilities within the same corporate structure.
"Organizing your business with an LLC subsidiary can be highly effective. It offers an avenue for your LLC's expansion and development while preserving the organizational structure of the parent company."
- Delina Yasmeh, J.D./Tax LL.M, Distinguished Expert in Mergers & Acquisitions
What Are the Advantages?
Based on our practical experience, here are the benefits of creating a Limited Liability Company subsidiary:
- In our case, we benefitted from the additional layer of asset protection via liability protection, separating our personal assets from the business ones.
- Easier management and administration.
- Separate ownership and assets.
- Tax benefits.
- More fundraising opportunities.
- Increased credibility and visibility.
- Greater control over company operations.
- Enhanced branding and marketing potential.
- Better protection in the event of a lawsuit.
- Improved overall business efficiency.
What Are the Disadvantages?
There are also some drawbacks to forming a subsidiary, such as:
- Increased administrative costs and stricter formalities (i.e., increased filing and reporting requirements).
- A reduced ability to tax-plan (due to more entities for the IRS to consider in their computations).
- Increased complexity (which can lead to disputes and misunderstandings among the members).
- Potential for conflicts of interest among the owners.
- Difficulty in dissolving the subsidiary if things go wrong.
Read our article and learn more about LLC Advantages and Disadvantages.
FAQs
Can a Single-Member LLC Have a Subsidiary?
A single-member LLC can have a subsidiary, but it's important to note that the subsidiary will be its separate legal entity. This can offer some additional liability protection for the owner of the primary LLC.
How Much Does It Cost to Set Up a Subsidiary LLC?
To set up a subsidiary LLC you can expect to pay between $100 and $1,000 in filing fees.
Can I Dissolve My Subsidiary LLC if Things Go Wrong?
You can dissolve a subsidiary LLC if things go wrong, but it's not always easy.
Can I Create a Subsidiary in a Different State From the Parent LLC?
You can create a subsidiary in a different state from the parent LLC. The parent LLC, acting as a holding company, can establish a subsidiary in any state, allowing for expansion or operational flexibility across different geographical locations.
References:
- https://www.lawinsider.com/dictionary/subsidiary-agreement
- https://www.stimmel-law.com/en/articles/llc-meetings-and-minutes-why-have-them
