What is a S-Corp Holding Company?

Holding companies are similar to other businesses, but instead of offering a product or service, they own other businesses and are created simply for that purpose. Holding companies can be corporations, LLCs, or limited partnerships.

They are required to own at least 51% of the stock in another company in order to control the direction it operates. Holding companies reduce risk, offer flexibility, and various tax benefits. When set up as an s-corp, a holding company must adhere to specific regulations and activities.

What is an S-Corporation?

S-corps are a variation of a corporation. S-corps are required to file with a state, which is similar to that of a normal corporation. The main difference is that they have specific tax benefits and must elect s-corp status.

Similar to that of a sole proprietorship or disregarded entity, S-Corps are taxed only once, when the profits flow through to the owners. This means that they avoid double taxation, but in every other way, S-corps are the same as C corporations.

Specifications of an S-Corporation

There are specific regulations for an s-corp in order to file as such. The first is that the shareholders of an S-corp must be individuals. They can also be non-profit (tax-exempt) organizations, trusts, or estates.

Additionally, shareholders of an S-corp must be a citizen and resident of the United States. This is extremely strict. Shareholders also cannot be an LLC or a corporation, and there must be less than 100 shareholders.

Can an S-Corp own an LLC?

S-corporations can own LLCs, and the members of the LLC can be either single individuals or entities. This means that S-corps, C-corps, and trusts can own an LLC. Other LLCs can also own an LLC. The main way that an s-corp can go about owning an LLC, is by setting up as a holding company.

Forming a Holding Company as an LLC with S-Corp Taxation

Since LLCs can legally elect tax status, forming a holding company as an LLC only gives you more options.

For example, although you can allow your LLC holding company to be taxed as an LLC, you can also choose to elect corporate status. There is one main tax benefit for s-corporations and that is “pass-through taxation.” This is when business income, as well as deductions, losses, and any credits, will flow through to the owners. This is different than that of other corporations, which suffer from double taxation.

Typically corporations will be both taxed at the corporate level, and once again for individual shareholders. It is essential that you are careful to maintain the operational standards of an s-corp because your s-corp status can be easily revoked, putting you back into C corp status.

Disadvantages of Filing as an S-Corp

One disadvantage of filing as an s-corp is the regulations involved. In order to continue being an s-corp, your company must meet specific requirements. These are federal restrictions. Because an LLC can be a pass-through entity without meeting the requirements of an s-corp, you can choose to elect a different status. They may seem similar, but they are different under IRS code.

Another disadvantage is that you must allocate profits and losses as a corporation. This means it will be extremely regimented and based on the percentage of ownership among shareholders. LLCs are different in that they can determine profits and losses in whichever percentages they choose.

Finally, the main disadvantage is that there are corporate requirements of any S or C corp. These can be tedious. When filing as an s-corp, your business will be required to keep clear records, hold specific meetings, and register to do business out of your formation state.

Single Member LLC vs S-Corp

If you only have one member of your business, then it would make sense to register as a single-member LLC. In some states, you are required to register your taxes as a sole proprietor when you are a single-member LLC unless you have multiple members and may not be able to elect s-corp status. If you have multiple members and meet all the requirements of an s-corp, it can make sense to set up your LLC as an s-corp Holding Company.

Starting an S-Corp holding company can be a difficult process to manage on your own. A business attorney who has experience creating S-corporations will know the ropes and can guide you through the process.

Get in touch with one of our team members today to schedule an appointment and start your s-corp holding company.

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