Post a new topic
    4 Replies Latest reply on Jan 14, 2010 4:28 PM by dublincpa

    Can a Corporation be the sole managing member of an LLC?

    entrep1 Newbie
      This is probably a simple question, but I can not seem to find a definitive answer. Can a C Corp soley own and be the only managing member of an LLC?

      Here is what I am trying to accomplish. I have one C Corp that retains essentially any venture that has a high liability to it. This Corp is a construction company. What I would like to do is have off shoot LLC's that are owned soley by the C Corp construction company. Typically unless I elect to be taxed as a corporation with these LLC's then I would be disregarded as an entity and profits would flow through to my own personal taxes like a sole prop would, however if the only owner of this LLC was the C Corp, wouldn't the taxes and income flow directly to the corp instead of me?

      The main idea behind this question is one of a very simple nature, income balancing within the C Corp Construction company. I would prefer to have the ability to delineate the profits from one LLC to the corporation and then take whatever the necessary distributions that are neccesary and pay myself, then with the remaining funds left over taking that money and using it to fund other LLC's to start them up and infuse them with cash flow as a loan an entirely different LLC that is also soley owned again by the C Corp construction company. Therefore I would be wiping the majority of the remaining income in the C-Corp in which would lower my tax bracket. In doing this I would be essentially loaning money to my self back and forth between different companies, if I am right this would theoretically create a tax shelter by constantly shifting money around that is loaned to the LLCs and of course charging an interest rate on these loans per the IRS guidlines of loaning money to yourself. If this is possible i would be able to fund business ideas before the money gets taxed, all the while still only paying myself what I need to live on through the corporation.

      Is this to difficult? Is this even legal? I am wondering if this might be tax evasion, which is not what i want to do, I just want to fund lots of different things and have more money then I would if it were taxed normally to do so.
        • Re: Can a Corporation be the sole managing member of an LLC?
          phanio Pioneer
          Not sure you will get the results you want by doing this - but it really depends on your state's (state of organization) rules. In my state of Texas - Yes - you can have a C-Corp be the only member - however, the LLC still needs to have a registered agent (a person).

          Business Money Today
          http://www.businessmoneytoday.com/Loans/Small_Business.html
          1 of 1 people found this helpful
          • Re: Can a Corporation be the sole managing member of an LLC?
            dublincpa Scout
            I am not an attorney and this is not legal advice. In addition, IRS regulations require me to advise you that, unless otherwise specifically noted, any federal tax advice in this communication (including any attachments, enclosures, or other accompanying materials) was not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of avoiding penalties; furthermore, this communication was not intended or written to support the promotion or marketing of any of the transactions or matters it addresses.

            What you are suggesting is legal from what I can tell, but it might not work exactly the way you want, especially in the long run. Most states that I am aware of permit what you want. However, not having a flow through entity can hurt you in the long run from a tax standpoint.

            In the situation you are proposing, it may be preferable that the common member manager do no business of its own. You may want to start a fresh entity for this purpose. The reason being that the interests of the LLC subsidiaries might be subject to the torts of the member/manager. That may happen anyway depending on how well formalities are followed, but a solid attorney can assist you in avoiding those pitfalls. If desired you could transfer the existing C Corp stock to a new LLC sub of the new corp. You could either get consolidated treatment or possibly liquidate the old corp into the new corp without tax consequence.

            From a tax standpoint, there are a couple of potentially undesirable consequences.

            First is the aggregation of profits in a C Corp once things turn profitable all the way around. C Corp Tax rates work their way up fast hitting 34% at just $75,000 of income. Then you pay max 15% on dividends this year. Next year that preferential treatment for dividends could (and my speculation is that they likely will) return to ordinary income rates up to 40%. That potentially creates a combined 75% corporate and individual tax effect on any profits left in the company. You can only W-2 so much before the IRS can claim excess compensation is being paid to officer shareholders.

            Second is the longer term issue of what happens when you want to sell one of the businesses. All or nearly all of the gain will be taxed at ordinary income rates to the corporation and then as dividends to the shareholder upon distribution. There is an opportunity to shift income directly to the shareholder with non-compete agreements and personal goodwill, but the amounts assigned have to reflect an economic reality. The result is almost the same for as asset or stock sale when the stock is held by a C Corp.

            With S Corps or LLCs tax as sole proprietor or partnership, there is typically only one level of taxations. Even though the income and capital gains rates might go back to the 40%/20% levels next year, that is a lot better than the potential 75% combined federal rate. If you have significant profits from these various enterprises, leaving the money in the C Corp could trigger excess accumulated earnings tax. However, this is very unlikely.

            Any at risk or basis issues would be tend to be substantially similar between an individual member-manager and a corporate member-manager. Even if you aren't familiar with this, you will likely learn about it regardless of what entity structure you choose.

            Your best bet may be to evaluate the appropriate entity choice for each activity based upon your plans for the operation of the business as well as your exit plan.

            Good luck. My contact info is contained in my profile if you need further assistance.
              • Re: Can a Corporation be the sole managing member of an LLC?
                entrep1 Newbie
                Thank you so much for you information! Your answer makes me ask two more questions.

                So contemplating the excessive income factor for the corporation, which I am not sure what that number is but I will find out, but if the money left in the corp got invested into another LLC as a loan, it would still be calculated as gross income to the IRS on my 1120 regardless of wether or not it was still in the corporation right? This is something that I skipped over and would negate my idea of how I want things to work.

                So that leads to my next question which you may have already answered, I basically would like to fund other ideas and business's without paying a load on taxes before it gets invested. The only skirt I can see around this is utilizing the $5000 dollar deduction permitted to corporations for startup capital, but these business's will be funded with far more than that. I was imagining that if the money left the parent corp as a loan it wouldn't be considered as "income" and would be an above the line deduction and therefor draw against the bottom line, reducing the overall income and tax applied to the corp. This loan would be considered as an investment I am imagining?

                Even as I write this it gets more and more complicated in my head. I need ease and simplicity without the headaches, would this simply be better accomplished with a series of LLC's that loan each other money and removing the corp out of the mix? I like the corp idea becuase it is entirely removed from personal assets, which in my LLC's I would likely be performing a majority of the work myself which would negate my ability to remove liability from myself and family

                Maybe if I formed an "Investment" Corp that owned all the others and did away with the whole LLC idea by having the offshoots be corporations instead??
                  • Re: Can a Corporation be the sole managing member of an LLC?
                    dublincpa Scout
                    I am not an attorney and this is not legal advice. In addition, IRS regulations require me to advise you that, unless otherwise specifically noted, any federal tax advice in this communication (including any attachments, enclosures, or other accompanying materials) was not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of avoiding penalties; furthermore, this communication was not intended or written to support the promotion or marketing of any of the transactions or matters it addresses.

                    Intercompany and parent sub loans are not deductions. However, if one is profitable and one is losing, they can usually offset subject to basis and at risk rules.

                    You really need a solid business attorney to workout the potential liability issues between you and the entities. Skimping there will likely cost you dearly in the long run. M best guess though is that if you are doing the work, I doubt that a corp owning LLCs would afford more protection than you owning the LLCs directly.

                    Whether the subsidiaries are C Corps or disregarded enitities, you get substantially similar tax results. There is no catch all strategy that can be developed on a message board with next to no details available, but in most instances combined tax bills will be lower with all flow throughs or a mix of C Corp and flow throughs.

                    Feel free to contact me directly if further guidance is needed.