Funding LLC Subsidiaries


E

echomirage0

My friend and I are planning to create our own LLC company.
But we came across the idea of having one parent LLC wholly
owning and governing multiple subsidiary LLCs.

Initially, we want to create two LLCs -- a parent and one
subsidiary. The subsidiary will be the money-maker, and the
parent LLC is the holding company. When the money rolls in,
we want to create additional subsidiaries under the parent.
Our questions are:

-- How are LLC subsidiaries funded?
-- Can profits from the first subsidiary fund newer
subsidiaries?
-- If yes, can subsidiaries fund other subsidiaries
without limit?
-- Or, can subsidiaries only fund other subsidiaries
during formation?
-- Am I correct to assume any funds from subsidiaries
will have to first filter thru the parent?

Thanks for your help in advance,
Variable
 
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S

San Diego CPA

My friend and I are planning to create our own LLC company.
But we came across the idea of having one parent LLC wholly
owning and governing multiple subsidiary LLCs.

Initially, we want to create two LLCs -- a parent and one
subsidiary. The subsidiary will be the money-maker, and the
parent LLC is the holding company. When the money rolls in,
we want to create additional subsidiaries under the parent.
Our questions are:

-- How are LLC subsidiaries funded?
-- Can profits from the first subsidiary fund newer
subsidiaries?
-- If yes, can subsidiaries fund other subsidiaries
without limit?
-- Or, can subsidiaries only fund other subsidiaries
during formation?
-- Am I correct to assume any funds from subsidiaries
will have to first filter thru the parent?
In a very general repsonse, the holding company at the top
will generally fund the new LLC's. The profits and cash
generated in the subs should flow up to make those monies
available to the holding company for funding new ventures.
However, the complexity of the organizational structure
you're contemplating requires far more technical advice than
can be practically given in a newsgroup. There are many
factors that you have not even hinted at in your question
that drive the decision as to the optimal choice of entity
and operating structure. You need to work with an
experienced CPA and/or business attorney to set up this
structure so that it meets both your current and your
reasonably projected future needs.
 
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K

Katie

My friend and I are planning to create our own LLC company.
But we came across the idea of having one parent LLC wholly
owning and governing multiple subsidiary LLCs.

Initially, we want to create two LLCs -- a parent and one
subsidiary. The subsidiary will be the money-maker, and the
parent LLC is the holding company. When the money rolls in,
we want to create additional subsidiaries under the parent.
Our questions are:

-- How are LLC subsidiaries funded?
-- Can profits from the first subsidiary fund newer
subsidiaries?
-- If yes, can subsidiaries fund other subsidiaries
without limit?
-- Or, can subsidiaries only fund other subsidiaries
during formation?
-- Am I correct to assume any funds from subsidiaries
will have to first filter thru the parent?
Why do you want to set up such a complicated organization?
The KISS method (keep it simple, stupid) generally works
best, especially for small businesses.

Generally businesses are funded by (a) their owners' capital
contributions, (b) borrowing from the owners or from third
parties, and (c) net income that is reinvested and not paid
out to the owners.

You certainly can set up chains of LLCs, or a parent LLC
that is a member (perhaps the only member) of any number of
lower-tier LLCs. Assuming none of these LLCs elect to be
taxed as corporations, all of the net income of all of them
will flow (for income tax purposes) to the parent LLC (and
their other members, if any) and from the parent LLC to its
members. The lower tier LLCs may distribute all or part of
their net income up to the parent, and the parent may
distribute those funds to its members, or reinvest them in
other "subsidiary" LLCs.

If your concern is to isolate liability exposure to the
owners of certain parts of the entire business enterprise,
you may want to look into the "series" LLC statutes that are
available in Delaware and a few other states. The series
concept allows for the creation of separate LLC interests
with respect to certain specified LLC properties or
activities, within what is essentially a single LLC.

Katie in San Diego
 
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S

Shyster1040

"If your concern is to isolate liability exposure to the
owners of certain parts of the entire business enterprise,
you may want to look into the "series" LLC statutes that are
available in Delaware and a few other states. The series
concept allows for the creation of separate LLC interests
with respect to certain specified LLC properties or
activities, within what is essentially a single LLC."

Keep in mind, however, that, particularly with the
wholly-owned subsidiary LLCs, the corporate formalities must
be scrupulously complied with; otherwise, you run the risk
of having the corporate veil pierced.

Second, a parent-subsidiary LLC structure may protect the
subsidiary LLCs from the liabilities of another sister
subsidiary LLC, but may not provide much protection from the
parent's liabilities - since the parent controls the
subsidiary, if a creditor can gain control of the parent it
will almost ipso facto control the subsidiaries.

The primary question to answer is why you want to operate
with more than one entity. Each entity you set up will come
with its own state filing requirements and state tax costs
(usually, a minimum franchise tax of $100 to $150 per year).

One or more of the LLCs may also be required to file to
qualify to do business in one or more states and, depending
on the activities (actual or imputed) of the parent LLC, the
parent LLC may also be required to file to qualify to do
business. Each such filing requirement carries its own
filing fee and, in some states, e.g., NY, has a publication
requirement that can be somewhat onerous and quite expensive
(at least $2,000 for each LLC required to file an
application to qualify to do business).

Each will also require the drafting of a separate operating
agreement, which must be made consistent with the operating
agreements of the other LLCs within the group. You also
have to keep track of multiple minute books and of who is
acting in what capacity with respect to each LLC (think of
the old Abbot & Costello routine - Who's on First?).
 
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K

Katie

Shyster1040 said:
"If your concern is to isolate liability exposure to the
owners of certain parts of the entire business enterprise,
you may want to look into the "series" LLC statutes that are
available in Delaware and a few other states. The series
concept allows for the creation of separate LLC interests
with respect to certain specified LLC properties or
activities, within what is essentially a single LLC."

Keep in mind, however, that, particularly with the
wholly-owned subsidiary LLCs, the corporate formalities must
be scrupulously complied with; otherwise, you run the risk
of having the corporate veil pierced.

Second, a parent-subsidiary LLC structure may protect the
subsidiary LLCs from the liabilities of another sister
subsidiary LLC, but may not provide much protection from the
parent's liabilities - since the parent controls the
subsidiary, if a creditor can gain control of the parent it
will almost ipso facto control the subsidiaries.

The primary question to answer is why you want to operate
with more than one entity. Each entity you set up will come
with its own state filing requirements and state tax costs
(usually, a minimum franchise tax of $100 to $150 per year).
I definitely agree with Shyster here. Whether you set up
multiple LLCs or use the series LLC concept, you're getting
into a very complicated situation with significant
administrative and compliance costs involved. The series
LLC sounds like a great idea, but there are a lot of
unresolved tax issues on both federal and state levels.

The simpler, the better, unless there are really good legal
reasons for creating multiple entities.

Katie in San Diego
 
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J

JD

My friend and I are planning to create our own LLC company.
But we came across the idea of having one parent LLC wholly
owning and governing multiple subsidiary LLCs.

Initially, we want to create two LLCs -- a parent and one
subsidiary. The subsidiary will be the money-maker, and the
parent LLC is the holding company. When the money rolls in,
we want to create additional subsidiaries under the parent.
Our questions are:

-- How are LLC subsidiaries funded?
-- Can profits from the first subsidiary fund newer
subsidiaries?
-- If yes, can subsidiaries fund other subsidiaries
without limit?
-- Or, can subsidiaries only fund other subsidiaries
during formation?
-- Am I correct to assume any funds from subsidiaries
will have to first filter thru the parent?

Thanks for your help in advance,
Variable
Your decision to use multiple LLC's could be a very good
idea; especially if you are investing in real estate, or
businesses which could incur significant liability.

In a typical scenario you would prepare 1065 (partnership
returns) for each of the subsidiary LLC with the income
going to the parent LLC. the parent LLC would then prepare a
1065 to you and your partner.

piece of cake...

Jerry Doblie
14045 Sunnyside Ave N
Seattle, WA 98133
206-365-0143
 
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S

Shyster1040

As has been pointed out earlier, it could be a very good
idea or a waste of time and money, all depending on what
you're going to be using the LLCs for.

For example, if you expect to develop a portfolio of real
estate investments, e.g., 5 small apartment buildings, then
it probably would be useful to have a parent holding LLC
with each building owned by a subsidiary LLC in which the
parent is the sole member.

Provided (and this is always the biggest trouble investors
end up having) that the corporate formalities are abided by,
and the separate legal existence of each entity respected,
for non-tax purposes each building investment should be
insulated from the liabilities that might arise from any of
the other buildings; e.g., if a tenant in building 1 wins a
major slip/trip/fall suit, the tenant could force the sale
of building 1 to satisfy the judgment, but would probably
not be able to reach any of the other buildings.

For tax purposes, the subsidiary LLCs would most likely be
disregarded (unless an election to be treated as a
corporation was made) and the parent would be treated as the
owner of all of the buildings and of all of the items of
income and expense associated with the buildings. There
would therefore only need to be one partnership return and
one set of K-1s prepared - those required for the parent
LLC.

At bottom, it all depends on what you're going to be doing,
what assets you'll be owning, if any, and what liabilities
(tax and non-tax) you're likely to face. Before you decide
on what type of structure to choose, you should sit down
with an accountant who has both business and tax experience
in the area you'll be focusing on to get some real advice
(what you get here doesn't count) based on all of the
relevant facts.

Also, don't forget to take into consideration the estate
planning opportunities and issues that may arise; LLCs and
partnerships can be used to minimize estate taxes, but the
planning is much more defensible if it was set up long
before death than if it was set up 2 weeks before.
 
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