Can an S-Corp have Subsidiaries and Partnerships?

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Can an S-Corp have Subsidiaries and Partnerships?

As talked about in Who Can Make the S-Corp Election?, S corporations have specific requirements about who is considered an allowable shareholder. A CPA firm specializing in small business taxes and accounting for s-corporations is always going to be the best place to have your small business accounting and bookkeeping questions answered, especially when it comes to S-Corp election and ongoing S-Corp accounting requirements.

As a refresher, allowable shareholders include:

  • Individuals who are U.S. citizens or permanent residents
  • Estates 
  • Certain Trusts 
  • Certain exempt organizations

Ineligible shareholders include:

  • C Corporations 
  • Partnerships
  • Nonresident Aliens 
  • Foreign Trusts 
  • Multiple Member LLCs 
  • Limited Liability Partnerships 
  • Individual Retirement Accounts

What does this mean when the roles are flipped and an S-Corp wishes to own interest in another business, fully own a subsidiary, or enter a partnership? All of these scenarios are possible, but naturally come with their own caveats, trade-offs, and requirements. Let’s break it down. Need a refresher on S-Corps before getting into the nitty gritty? Check out What is an S-Corporation for a review.

Can an S-Corp Own Stock in a C-Corp?

An S corporation is allowed to own up to 100% stock in one or multiple C corporations, and this does not jeopardize its S-Corp status. How to Keep the S-Corp Filing Status covers this and some other pitfalls for small business owners filing as S-Corps. That said, if the S-Corp owns more than 50% of the corporation’s stock, then the S-Corp has the right to control the subsidiary C-Corp. Ownership of 80% or more of the C-Corp stock establishes an affiliated group relationship. However, the parent S-Corp is excluded from the affiliated group for federal tax purposes. 

This means that only other subsidiary C corporations can be included in the affiliated group and the S-Corp cannot join in filing a consolidated return. Additionally, income from the C-Corp subsidiary is subject to pass through income limits and tax unless the S-Corp shareholders are actively managing the C-Corp. 

Note: Even if an S-Corp owns all of the shares of a C-Corp, it may still be beneficial to continue operating the subsidiary as a C-Corp in order to use loss carryforwards.

Can an S-Corp Be a Member of an LLC?

The answer to this question may vary depending on state laws and the specific business, but in general the answer is yes. As you may remember, an LLC is only an allowable shareholder in an S-Corp if it is a single-member LLC and owned by a U.S. citizen or permanent resident. However, when the roles are reversed, an S-Corp is usually allowed to own or be a member of an LLC.

Since both S-Corps and LLCs are pass-through entities, double taxation is not a concern. In terms of your small business bookkeeping and tax, there is likely no benefit to an LLC owning an S-Corp. However, this structure may provide other benefits such as flexibility of members (shareholders) or ownership percentages. The primary focus in this structure is what tax treatment will result from S-Corp ownership in an LLC. A CPA firm like ours, that has small business owners and S-Corp status in mind, can give guidance on how these possible benefits could affect your small business taxes at the various entity and personal taxation levels.

  • Single-Member LLC: If the S-Corp is the sole owner of an LLC and no election has been made by the LLC then the LLC will be disregarded as an entity and the income will flow through to the S corporation. While this doesn’t provide any tax savings, it does simplify reporting since only one entity needs to file, and there may be legal risk-mitigation advantages.
  • Multi-Member LLC: When the S-Corp is a member of an LLC, but not the sole owner, then the LLC will be treated as a partnership and thus taxed as partnership income to its owners. 
  • An LLC That Elects to be Taxed as a Corporation: If an LLC elects to be taxed as a corporation, regardless of S-Corp ownership, the LLC will file its own separate tax return.

If an S-Corp with multiple shareholders becomes a member of an LLC that has previously made the S-Corp election, the LLC will lose its S-Corp status since a corporation would be considered an ineligible shareholder (see Who Can Make the S-Corp Election). A possible solution to this problem would be a Qualified Subsidiary. This is getting pretty deep in the weeds though, so if you think you might benefit, give us a call to learn more.

Can an S-Corp Join a General Partnership?

Yes! Just like many of the scenarios above, an S-Corp as a whole may enter a partnership despite the fact that most corporations or partnerships are not allowed to be shareholders in an S-Corp. In fact, using a partnership structure with your S-Corp has the potential to give small or larger business owners a legal workaround to some of the most common drawbacks of an S Corporation, such as shareholder limits, eligibility requirements, and profit sharing flexibility.

Final Thoughts

An S-Corp may be a great structure for your small business, and as you can see there are multiple options for small business owners who may have more complicated situations. Although we covered the basics of S-Corp subsidiaries above, there are a lot of variables and specifics that may arise, and it is vital for a small business to have the certainty that they are structuring and planning accordingly for their small business taxes and S-Corp accounting, which is why we always recommend consulting a small business tax professional or CPA firm that has accounting services for small businesses as their top priority.