Holding Companies

Can an S‑Corporation Own an LLC? Yes. An S‑corporation can own an LLC. The owners of an LLC called members may be individuals or legal entities, including S‑corporations, C‑corporations, trusts, and even other LLCs.

One common way an S‑corporation may own an LLC is by acting as a holding company. In this role, the S‑corporation does not directly operate the businesses but instead owns them as subsidiaries. This article lays out advantages of the structure.

What Is an S-Corporation?

An S-corporation is not a formal business structure; it is a tax classification. Both an LLC and a corporation can choose to be taxed as an S-corporation.

To become an S-corporation, the organization must meet the following restrictions set out in the Internal Revenue Code at 26 U.S. Code § 1361:

• Have no more than 1,000 shareholders.

• The shareholders must be U.S. citizens or permanent legal residents.

• The shareholders must be private individuals (not ineligible LLCs, other corporations, or certain types of trusts).

• The S-corporation can only issue one class of stock.

While this generally makes an S‑corporation an unusual choice for startups seeking venture capital, businesses with complex shareholder structures, or companies planning international ownership, it can be a powerful tool for closely‑held businesses, family enterprises, and professional practices that want pass‑through taxation, liability protection, and simplified corporate governance.

The Benefit of S-Corporation Status

In LLC terms, a member is an owner. By default, LLC members are not employees and cannot be treated as such. Under federal tax law, members are compensated through distributions (or owner’s draws), not salaries:

• Single‑member LLCs: Taxed by default as a disregarded entity. Income passes directly to the owner, who must report it as personal income.

• Multi‑member LLCs: Taxed by default as a partnership. Members receive distributions, which are subject to both income tax and self‑employment tax.

When an LLC elects to be taxed as an S‑corporation using IRS Forms 2553 & 8832, members can be treated as employees. This allows compensation to be split between:

• Salary (W‑2 wages): Subject to both income tax and employment tax (FICA).

• Distributions: Subject only to income tax, not self‑employment tax.

This distinction is critical because employment tax is typically around 15%. By designating a reasonable salary (required under IRS rules) and taking the remainder as distributions, members can reduce exposure to self‑employment tax. The portion distributions are not subject to self-employment taxes.

The main benefit of an S-corporation is that it saves you from having to pay self-employment tax on distributions.

What is a holding company?

A holding company is a legal entity, often a corporation, LLC, or limited partnership, that owns enough stock or membership interests in another company to exercise control over its management and direction. Unlike an operating company, a holding company does not produce goods or services. Its primary purpose is to own and manage investments, such as subsidiaries, marketable securities, or real estate portfolios.

One common use of a holding company is to sit between the individual owner and the operating business. This structure allows profits to flow up to the holding company, where they can be retained until the owner chooses to distribute them. Dividends received by the holding company may benefit from favorable tax treatment under the IRC 243, making this arrangement efficient for certain business owners.

Another use of a holding company is to manage investments directly. These can include securities, rental properties, or other passive income‑generating assets. Income from these investments flows into the holding company, where it can be accumulated and later distributed to the owner as dividends (or distributions).

In both contexts, the holding company serves as a vehicle for asset protection, tax efficiency, and centralized management, offering business owners flexibility in how they structure and safeguard their enterprises.

The Benefits of Using a Holding Company

There are several important benefits to structuring your business or investments through a holding company. One of the most significant is asset protection. By placing assets in a holding company, they are generally insulated from the creditors of the operating company. This separation of ownership and operations is a key legal safeguard recognized under state corporate and LLC statutes.

Another benefit is the timing of compensation. A holding company allows income to be retained at the entity level until the owner chooses to distribute it. This can provide flexibility in tax planning and cash‑flow management.

Holding companies can also play a role in federal estate tax planning. Estates above the federal exemption threshold are subject to estate tax. Assets held directly in an individual’s name may be taxable upon death, whereas assets structured through a holding company can be managed more strategically for succession and estate planning purposes.

Beyond asset protection and tax planning, holding companies are frequently used in mergers and acquisitions and in preparing for the future sale of a business. By centralizing ownership, the holding company can facilitate transactions, streamline due diligence, and provide flexibility in structuring deals.

Should my company elect S-corporation status?

Operating as an S‑corporation can be an effective way for small business owners to reduce employment taxes on ordinary business income. By allowing income to be split between salary and distributions, the S‑corporation structure creates opportunities for tax savings that a traditional LLC does not provide.

The challenge with an S‑corporation is that it comes with more formalities and specific restrictions on distributions and ownership. These requirements can feel burdensome compared to the simplicity of a single‑member LLC, which is often favored by entrepreneurs for its ease of setup and minimal compliance obligations.

However, the trade‑off is that a single‑member LLC is taxed as a disregarded entity, meaning all income flows directly to the owner’s personal tax return and is subject to both income tax and self‑employment tax. While the LLC remains a popular choice for its flexibility and simplicity, the S‑corporation election offers a potential advantage by limiting self‑employment tax exposure and maximizing after‑tax income.

For many business owners, the most strategic approach is to form an LLC under state law and then consider electing S‑corporation tax status. This option combines the simplicity of the LLC with the tax efficiency of the S‑corporation, making it a structure worth evaluating for long‑term growth and profitability.

Because the tax and legal implications can vary depending on your circumstances, it is important to consult with a qualified professional before making a decision. If you are considering whether an S‑corporation election is right for your LLC or business, our experienced Florida business attorneys and Rhode Island business attorneys are ready to guide you. Call us today at 401‑272‑8300 or complete our online form to schedule a consultation and receive tailored advice for your business.