Limited Liability Companies (LLCs) are a popular choice of business entity because they provide owners with limited liability protection, flexibility in management structure, and tax benefits. However, as a business grows, owners may choose to create multiple LLCs to manage different aspects of the company. This raises the question: Can you form an LLC to manage other LLCs?
The short answer is yes, it is possible to form an LLC to manage other LLCs. This type of LLC is commonly referred to as a “holding company” or a “parent company.” The purpose of a holding company is to own and control other companies, including LLCs, through its ownership of their stock or membership interests.
Establishing a holding company can reduce risk and liability for the owners of the separate LLCs, which is one of the main advantages. The owners can safeguard their private assets from any potential litigation or liabilities resulting from the management of the individual LLCs by establishing a distinct legal entity to own and control the LLCs.
A holding company can offer more flexibility in the management and structure of the various LLCs, which is another advantage. Suppose the owners of the various LLCs are not active in day-to-day management. In that case, the holding company may choose its own officers and directors to oversee the activities of the individual LLCs.
However, forming a holding company to manage other LLCs does come with some drawbacks. For example, creating a holding company can be more complex and expensive than simply forming individual LLCs. Additionally, the holding company will be subject to its own set of regulations and requirements, which can add to the administrative burden.
It is also worth noting that forming a holding company to manage other LLCs may not be the best option for every business. For example, smaller businesses may not have the resources or need for a holding company. Additionally, forming a holding company can limit the ability of the individual LLCs to raise capital or enter into certain types of business transactions.
Conclusion
Forming an LLC to manage other LLCs is possible, and can offer certain benefits for businesses that require greater flexibility and protection from liability. However, it is important to carefully consider the costs and benefits of forming a holding company before making the decision to do so. As with any business decision, it is recommended that you seek the advice of a qualified attorney or financial professional before proceeding.
Video Transcript
Can You Form an LLC to Manage Other LLCs? and What Is the Liability Associated with This?
Those are the questions I am answering today. I appreciate the question that was posted public on YouTube by Mia Pettway. She asked, “can you form an LLC to manage another LLC or other LLCs, and what is the liability by forming this LLC?”
All right, so picture this. You have one LLC that is engaging in a certain type of business, and then you have another LLC that is engaging in another type of business and another LLC, and you are managing all of these, and you are looking at limiting your liability. Well, the first thing you remember is, so by the way, you certainly can do this. There is nothing wrong with it. But remember, you are always liable for your own actions. So even if you have an LLC, you are liable for what you do.
Let’s say, for example, that you have a dog-walking business. I am picking a simple example because everybody can imagine a dog walking business, and let’s say when you walk the dogs, and it is reasonable to have them on a leash, the signs all say have them on leashes, but you decide, you know what, not today. I don’t feel like holding a leash. I am just gonna let him run free. Imagine those dogs go off and bite somebody, and there are injuries, and the person who is injured goes to file a lawsuit. Now that person and their attorney finds out that you have an LLC. We will call it Annie’s Dog Walking LLC.
Do They Have to Sue Only the LLC?
No. They can sue you as well. Why? Because, yes, your business was liable, but you were also liable. You were also negligent. You are always liable for your own conduct. So when thinking about whether it makes sense to have one LLC manage multiple LLCs, just always keep in mind that you are always liable for your own actions.
So Then You Might Ask, Well, Why Would I Even Do This If I Am Always Liable and I Am Managing the Top LLC?
Why would I even have that management LLC? Here is the answer. Because it might not be you working in the management LLC, you may have other employees or contractors, or vendors working in the management LLC, managing the other LLCs. And if the employees do something wrong, negligent, or some otherwise cause a lawsuit, your management LLC may get sued. The individual LLCs that were involved might get sued, but you personally won’t get sued.
So Can You Form an Llc to Manage Other LLCs?
Yes, you can. And the reason that would be beneficial is if you have employees or contractors and you are not necessarily just doing everything yourself.
What Is the Liability by Forming This LLC?
It is always liable for whatever it does wrong, but that liability stops with the management LLC, and it doesn’t go to you as long as you are not involved.
Conclusion
If you have follow-up questions, feel free to post them in the comment section below. I am Aaron Hall, an attorney for entrepreneurs and business owners. If you are interested in avoiding other problems in your company and getting educated on just the basics of how to avoid common pitfalls experienced by a lot of new businesses along with the stress and the expense and the legal fees that go along with that, you are welcome to get my free newsletter at aaronhall.com/free. You will start out by getting a PDF that explains some of the common legal problems. Then, I follow up with educational videos, helping you better understand those problems and try to avoid them in your company.
By the way, don’t ever do any of this without consulting with an attorney in your jurisdiction. This is general public education. I am not providing advice for you to go act on, but rather, to educate you generally and so you know the right questions to ask when consulting with your attorney. This is a public educational YouTube channel. You are welcome to subscribe if you want more videos like this. My hope is that your company grows, and that you achieve success in business and in life.