Can an S Corporation Own an LLC? 2025 Tax Guide

Many business owners wonder if their S Corporation can own an LLC — and the short answer is yes, it can.
But before you jump in, there are a few important details about ownership, tax treatment, and structure that you must understand.

This guide breaks everything down in plain English — no legal jargon, no AI-sounding fluff. Whether you’re a U.S. entrepreneur or a foreign business owner setting up in the States, here’s everything you need to know.

First, let’s clear up what an S Corporation really is

An S Corporation (S-corp) isn’t a special kind of company — it’s a tax election you make with the IRS using Form 2553.
You can start as a regular corporation or even an LLC, and then choose to be taxed as an S Corporation vs LLC.

Here’s why many small businesses do it:

• It avoids double taxation — profits “pass through” to shareholders.
  
• It allows owners to take a mix of salary and distributions (potentially lowering self-employment tax).
  
• It creates a more professional structure compared to a simple LLC.

However, S-corps come with strict ownership rules, which become crucial when we talk about an S-corp owning another entity.

So, can an S Corporation own an LLC?

Yes, absolutely.
An S Corporation can own an LLC — either fully or partially — depending on how the LLC is structured and taxed.

There are two main scenarios:

1. The S Corporation owns a single-member LLC

If your S-corp owns 100% of an LLC and that LLC doesn’t elect to be taxed as a corporation, the IRS treats it as a “disregarded entity.”
That means the LLC’s income and expenses are simply reported on the S-corp’s tax return. There’s no separate federal tax return for the LLC itself.

This setup is neat, simple, and popular for:

• Holding assets like property or vehicles
  
• Running a separate product or service line
  
• Keeping liability for riskier projects away from the main business

2. The S Corporation owns a multi-member LLC

If the LLC has more than one owner (for example, your S-corp and another person or company), then by default it’s treated as a partnership for tax purposes.
This adds another layer of filing and bookkeeping because the LLC must file a partnership tax return (Form 1065) and issue K-1s to each owner.

This structure can work well for joint ventures or collaborations, but it’s more complex.

IRS rules you can’t ignore

Here’s where people often get tripped up. The S-corp rules are strict, and violating them can destroy your S status — which can mean a nasty surprise at tax time.

1. Eligible shareholders only:
   S-corps can only have shareholders who are:
   
   • U.S. citizens or residents
     
   • Certain types of trusts or estates
     
   • Another S Corporation (yes, it can own an LLC, but not another corporation directly)
     Nonresident aliens, partnerships, or regular corporations can’t own shares in an S-corp.
2. Domestic entity only:
   Your S-corp must be formed in the United States — foreign corporations can’t make the S election.
   
3. Only one class of stock:
   All shareholders must have the same rights to distributions and voting power. No preferred shares or special classes.
   
4. Proper tax elections for the LLC:
   If you want the LLC taxed differently (for example, as a corporation), you must file Form 8832 or Form 2553 on time. Missing this step can completely change your tax outcome.

Why people choose this setup

Having an S-corp own an LLC can be a smart business move. Here’s why it’s often used:

• Asset protection:
  Keeps valuable assets or high-risk activities legally separate from your main business.
  
• Simpler reporting:
  A single-member LLC owned by your S-corp is ignored for tax purposes, so there’s no need for separate federal filings.
  
• Scalability:
  You can create multiple LLCs under one S-corp to organize different parts of your business — for example, one for real estate, one for eCommerce, one for consulting.
  
• Cleaner branding & management:
  Each LLC can operate with its own name, bank account, and books while rolling up to the same parent company.

When this structure can cause trouble

While it sounds great, there are real pitfalls to avoid:

1. Accidentally breaking S-corp rules.
   If your ownership setup includes an ineligible shareholder (like a foreign individual or corporation), you can lose your S election.
   
2. State-level headaches.
   Some states treat LLCs and S-corps differently. You might owe annual requirements, franchise taxes, or filing requirements even if the IRS ignores the LLC.
   
3. More entities = more work.
   You’ll need separate bookkeeping, operating agreements, and bank accounts. Forgetting this separation can destroy your liability protection.
   
4. Partnership complexity.
   If your LLC is multi-member, expect more filings, profit allocations, and possible self-employment tax complications.

Real-life example

Let’s say your S Corporation runs a small digital marketing agency.
You want to buy a commercial property to rent out, but you don’t want to mix that with your service business.

Here’s how it could work:

• You form a new LLC and make your S-corp the sole owner.
  
• The LLC holds the property, collects rent, and pays expenses.
  
• For taxes, the LLC is “disregarded,” so all income flows through the S-corp return.
  
• If a tenant sues over a property issue, the main agency remains protected.

That’s the beauty of this structure — simplicity for taxes, safety for assets.

✅ Step-by-step: How to set it up correctly

1. Confirm your S-corp shareholders are all eligible.
   
2. Form your LLC in your state (or Delaware/Wyoming if that fits your structure). For foreign owners, choosing the best US states can be crucial.
   
3. Name your S-corp as the owner in the Articles of Organization.
   
4. Create an operating agreement showing the S-corp’s ownership.
   
5. Apply for an EIN for the LLC if required.
   
6. Keep records separate — bank accounts, contracts, accounting.
   
7. Consult your CPA or business attorney before filing any tax elections.
   
8. Stay compliant annually — file annual reports deadlines, maintain good standing for both entities.

Pro Tip for Foreign Entrepreneurs

If you’re not a U.S. citizen or resident, forming a US company isn’t allowed under IRS rules.

But that doesn’t mean you’re out of options. Many foreign business owners form a C corporation or a U.S.-based LLC that chooses corporate taxation — both can legally run operations inside the United States.

If the paperwork or rules feel confusing, it’s smart to get help early. We are specialized in setting up foreign-owned companies and can guide you through each step — from File Express filing to tax ID registration — so you stay compliant from day one.

The Bottom Line

An S corporation can own an LLC, and for many small business owners, it’s a great way to combine flexibility and protection.
Still, the question isn’t just “Can I do it?” — it’s “Does it make sense for my business?”

If you’re looking for stronger asset protection, cleaner organization, and smooth pass-through taxation, this setup checks all the boxes.

Just be cautious: the IRS rules around ownership are strict, and one small mistake — like having an ineligible shareholder — can undo your S-corp status.

When it’s structured properly, though, this combo gives you the best of both worlds: the liability shield of an LLC and the tax perks of an S-corp.