What Is a Parent LLC, and Why Do You Need It?

By | March 14, 2012

In today’s trigger-happy age of litigation, it’s easy to see why people work hard to keep themselves free of liability. After all, liability is a big part of what ultimately requires so many people to pay big money in settlements and court awards when they’ve been sued. And it’s a big part of the reason people use Limited Liability Companies in order to make sure their assets are separate from their overall wealth.

Essentially, the LLC does exactly as advertised – it keeps your liability limited. But while many people might just form one or two LLC’s in order to keep their assets protected, others take it a step further and create an umbrella LLC – or parent LLC – to really funnel liability away from them personally.

So if you’re asking why you might need an LLC, the picture might be clearing up for you: it may just be your way to prevent any potential financial disasters headed your way.

The Parent-Subsidiary Structure

When creating a parent LLC, you also need smaller LLC’s – the subsidiaries – to flow through that same parent LLC. This creates a parent-subsidiary structure that can be surprisingly efficient for tax purposes. But because our focus here is liability, it’s also important to recall just how efficient this structure can be to avoiding it.

For example, consider this point: with just a single LLC, there is only one link of ownership between you and the LLC. But in the parent-subsidiary structure, even tracing a subsidiary LLC to its owner will only take the plaintiff to the parent LLC, which again is separate from your personal and core assets. While they might be able to sue the company, they’re not able to sue you because you have no personal liability invested in said company.

When Do You Need this Structure in Place?

Some lawyers will tell you that LLCs are so easy and efficient that it’s a great idea to simply set them up all the time. This is particularly applicable in the area of real estate, where liability questions constantly present potential problems. Others will have you split up your own property into these separate entities so that you’re immune from all manners of financial worries.

The truth is, your own situation will dictate your need for parent LLC’s and the parent-subsidiary structure. If you don’t own a lot of property, it might not make as much sense to set up entire companies to protect it. If you own a lot of assets and real estate, on the other hand, you’ll want to divide up this empire to avoid making it vulnerable to a single attack.

Some advocates will say that you can use this structure even if you’re not rich; it’s simply a self-protection measure. If that’s important to you, it’s worth investigating the parent-subsidiary LLC structure even further in order to find out how to do it, and whether it’s truly the right decision for you.

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